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Yuan sent on wild ride; hits 4-month low

Brent Lewin | Bloomberg | Getty Images

The Chinese yuan fell sharply against the U.S. dollar on Tuesday as tight onshore liquidity conditions fueled rising expectations of further monetary easing, according to analysts.

The currency, which is still tightly controlled by the Chinese central bank, declined around 0.5 percent to a four-month low of 6.2064 against the dollar. At one stage it was on track for its biggest single-day decline since 2008, but it trimmed losses to finish the session at 6.1855.

"Despite the recent interest rate cut, domestic liquidity has tightened," Nizam Idris, head of strategy, fixed income and currencies at Macquarie told CNBC, noting that short-term interest rates in China have risen sharply in recent days.

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The People's Bank of China rate cut the 12-month benchmark lending rate by 0.40 percentage points to 5.6 percent on November 21.

This effectively reduced the cost of funds without increasing quantity of funds available, he said.

RRR cut next?

As a result, the market is pricing in further monetary easing in the form of a reserve requirement ratio (RRR) cut, which could happen sometime this week, Idris said.

The catalyst for the RRR reduction could be the consumer price inflation (CPI) data due out Wednesday.

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"If CPI again shows there are disinflationary pressures in the economy, this could strengthen the argument for easing," Idris said.

The consumer price index (CPI) rose 1.6 percent in October from the year-ago period, remaining at its slowest rate in five years.

Idris says the yuan has declined at a much quicker pace than he initially anticipated.

He expects the downtrend to continue, noting dollar-yuan could reach 6.25 over the next three months.