China’s central bank unexpectedly weakened its RMB fixing this morning by 1.86% to 6.2298 from 6.1162 on Monday after having kept the fixing in a narrow range of 6.10-6.13 for about four months. The move aims to improve its fixing mechanism to better reflect market condition according to PBoC statement. Meanwhile, the PBoC also noted that the increasing diverging market view on RMB has created room for fixing to move towards market driven mechanism.

 As a result of reset of Yuan fixing system, the spot Yuan has weakened by around 1.5% in both onshore and offshore market as of writing this morning. Meanwhile, it also hit Asia FX with both Korean Won and Singapore dollar fell by more than 1% against the USD.

The unexpected 1.86% devaluation of USDCNY fixing today aims to improve China’s fixing mechanism to better reflect market condition.

We believe today’s move is more driven by China’s SDR bid rather than intension to support export. A 1.5-2% mild depreciation is unlikely to boost China’s export in our view.

Tomorrow’s fixing will be the key to test whether this devaluation of fixing is one-off event or a start of new fixing system. Our best guess is that it may be the one-off adjustment.

Should it is proved to be one-off, we think a combination of band widening and RRR cut is likely to be the next policy option to increase RMB’s flexibility.

In the near term, we may see more volatility ahead when RMB is moving from policy driven to market driven. However, we believe a stable USDCNY albeit at a wider range of 6.10-6.40 may be still important for China during the final stage of capital account opening.

The author is an economist with OCBC Bank of Singapore