Chinese yuan at 3-month low on US rate hike speculation, charts suggest 5-year low soon

Charts suggest that the pair is now likely to break the January high of 6.60 making a new 5-year low for the yuan.

The Chinese yuan has fallen for the fourth straight week and traded at a 3-month low as at Friday's close with the market preparing for a more volatile yuan in the near future as the US Fed is expected to hike rates further this year.

USD/CNY on Friday (27 May) rose to 6.5625 from the previous close of 6.5565 before settling at 6.5607, which was its highest daily close since 19 February.

The final figures of US Q1 GDP data will be released later tonight (8:30 PM in Singapore) and two hours later, the Federal Reserve Chair Janet Yellen will speak at a function in Harvard University. The data and Yellen's comments are crucial for pricing in the timing of the next US rate hike.

Charts suggest that the pair is now likely to break the January high of 6.60 making a new 5-year low for the yuan. A break of that will all likely take the pair to 6.70, weakening the Chinese unit further.

Analysts said the People's Bank of China (PBoC), the Chinese central bank always has a tight control over the depreciation speed of the yuan.

"The PBOC seemed to be attempting to move away from a strictly US dollar peg to prepare for 2016 US rate hikes, but it's also apparent that the PBOC has a tight grip controlling the speed of depreciation of the yuan," Stephen Innes, a senior trader at OANDA Asia Pacific, was quoted as saying in an article appeared in South China Morning Post.

When the greenback weakens, the yuan peg follows suit, but when the dollar strengthens, the yuan peg switches to a mechanism following a basket of currencies which include the euro, the Japanese yen and the British pound as well as the US dollar to mitigate the yuan's steep depreciation and to slow the pace of capital outflows.

With a possible interest rate hike in June by the US Federal Reserve – central bank to the world's largest economy – Innes said the Chinese currency is likely to have "a very volatile ride" ahead

The PBoC on Friday set the USD/CNY reference rate at 6.5490, 62 basis points stronger than on Thursday. Traders are allowed to deal up to 2% either side of the reference point for the day.

The currency traded offshore in Hong Kong also weakened on Friday.