The yuan has weakened through key levels, including 6.80 per dollar, as the PBOC has not seen a significant increase in capital outflows so far. Markets are testing the PBOC’s tolerance for yuan depreciation, and are finding little resistance. This round of yuan weakness is not over, but the path to additional depreciation will not be smooth, as occasional rounds of PBOC and state bank-led stabilization should be expected. The PBOC’s need to reduce intervention over time argues for additional volatility and faster depreciation in the coming months until market perceptions of the yuan’s valuation adjust.
