The PBoC has been guiding the Yuan lower for the past nine days. There is definitely no basis for the RMB to devalue continuously and going forward the RMB exchange rate regime will continue to be based on market supply and demand. Also, much will depend on the gyrations in the CFETS NEER index.

It is highly unlikely that the PBoC has set a target level for the USD/CNY and USD/CNH and the announcement by the CFETS reveals an important preference of the government to focus on a currency basket using the end-2014 NEER level as the benchmark. The NEER has been falling recently, and if China allows, for example, a 5% fall in the NEER by year-end, USD/CNY could move to as high as 7.22.

"Our forecasts suggest a preference for a relatively stable NEER, but this would still imply USD/CNY appreciating in an environment of USD strength. If China wants to focus on a stable NEER this would imply a move in USDCNY to 6.80 by year-end," notes Barclays in a research note to its clients