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Are the days of a one-way yuan over for good?

Chinese one-hundred yuan banknotes are arranged for a photograph at a Standard Chartered Plc bank branch.
Brent Lewin | Bloomberg | Getty Images

The Chinese yuan hit a fresh 16-month low against the U.S. dollar on Friday and while it may resume an appreciation trend, analysts say the currency's days as a steady one-way bet are over.

The renminbi fell as low as 6.2532 to the dollar, extending this week's fall.

It has lost over 3 percent against the greenback this year as investors anticipated a widening of the currency's trading band. China's central bank controls the yuan by setting a daily midpoint from which it can rise or fall by a certain amount. In mid-March, the central bank doubled that amount - the trading band - to 2 percent.

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Robert Minikin, senior FX strategist at Standard Chartered told CNBC the yuan's recent depreciation marked the start of a "new FX regime" for China.

"Greater volatility in spot is the new normal," said Minikin.

While Minikin still expects the renminbi to resume a mild appreciation path soon, he said it would be interrupted by bouts of volatility.

"We've got to except now that that appreciation trend will be dominated by the month-to-month, quarter-to-year, even year-to-year swings in the value of the Chinese currency," he added.

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A one-way bet no more?

China's yuan has long been considered a 'one-way bet' given its steady appreciation of around 12 percent from mid-2010 to the end of 2013.

Analysts say the central bank's recent widening of the yuan's trading band and its subsequent depreciation was designed to target speculators who had long been betting on the yuan's upward trajectory.

However, according to Dominic Bunning, currency strategist at HSBC, just because policy makers have attempted to curb the yuan's previous one-way appreciation trend, it doesn't mean it won't allow any strength in the future.

"It's hard to say that the one-way trade on the yuan is completely over, if you look at analysts' expectations the market is still broadly looking for the currency to appreciate over the next couple of years, but it certainly means there is going to be more flexibility in how the currency trades in the coming years," he said.

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Bunning noted several fundamental drivers that are set to keep the yuan on a strengthening path: China's resilient external balance, which is relatively sheltered from U.S. dollar volatility; relatively attractive interest rates; policy makers are not actively trying to weaken the currency.

"If the yuan does start to show signs of appreciation, as long as it isn't appreciating in that one-way steady trend and expectations are starting to rebuild, then policy makers shouldn't be too concerned," he added.

Yet, other analysts are more convinced that the days of the yuan's one-way rise are fully over.

"I think the key conclusion to take away from this [recent depreciation] is that the [time of] nominal appreciation of the renminbi is probably over," said Klaus Baader, chief economist, Asia Pacific, Société Générale.

"The renminbi is clearly not undervalued anymore no matter what the U.S. Treasury says and it would be inappropriate for it to continue to appreciate," he added, referring to U.S. authorities' long-standing gripe over the Chinese deliberately keeping a firm grip on its currency to maintain a competitive trade advantage.

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