Another way China can steer the yuan is to undertake active and unpredictable intervention. Seven-day repo rates have declined at the same time as the Chinese central bank has been removing liquidity and the currency has been weakening. This suggests that the central bank could indeed be actively intervening in the market today to deter "hot money" flows.
Either way, the government appears to have been successful in injecting short-term uncertainty. Implied volatility has jumped sharply for CNH (off shore) options with six months to expiry or less, even if it has remained relatively stable for long-term options.
The second explanation is that the government is using such methods in response to the sharp downward move in other emerging market rates. It previously set weak fixings in May 2013, the last time we saw a sharp depreciation in other emerging market foreign exchange rates. The yuan's real effective exchange rate appreciated by around 10 percent in 2013 alone.
However, despite these short-term tactics, longer-term yuan appreciation is set to continue. China is still experiencing inflows with respect to foreign direct investment and sports a current surplus worth 2 percent of gross domestic product. Yuan appreciation would be consistent with the country's much-needed rebalancing toward consumption and away from exports and investment, and with its need to put more wealth in the hands of its savers.
(Read more: Is China getting ready to widen the yuan's band?)
And with foreign exchange reserves of $3.8 trillion, the country has ample defenses even if it starts to see capital outflows. Nevertheless, investors should bear in mind that uncertainty over the central bank's fixing policy and over China's economic growth will mean currency volatility is likely to be elevated in the months ahead.
Alexander S. Friedman is the Global Chief Investment Officer of UBS Wealth Management and UBS Wealth Management Americas and is the Chair of the UBS Global Investment Committee. In this capacity, Alex oversees the investment policy and strategy for approximately $1.7 trillion in assets.