Derivative markets are pointing to renewed bets on yuan depreciation, with a three-month measure of expected price swings poised for the biggest monthly increase since January. Other indicators, such as the premium on options to sell the yuan over those to buy and the discount of forward contracts over the spot rate, have also climbed, indicating rising expectations for declines.

The increased pessimism comes after a period of calm that sent the measures to the lowest in at least nine months as the Federal Reserve held off on raising interest rates and investors bet that China would steady the yuan before it hosts a Group of 20 meeting in September. Traders are probing the People’s Bank of China’s willingness to allow the yuan to fall between the G-20 gathering and the currency’s entry into the International Monetary Fund’s Special Drawing Rights on Oct. 1, especially with the chances of Fed action increasing.

"After G-20 ends next Monday, the market may want to test how much yuan depreciation the PBOC can tolerate," said Gao Qi, a strategist at Scotiabank in Singapore. "China doesn’t want the yuan to move too much during G-20 and become a topic of discussion. SDR’s impact will be smaller than G-20." 

Eoin Treacy's view

China is under the spot light as it prepares to host the G-20 summit next week and not least because it wants to use the event as an opportunity to showcase its newly found position as an economic superpower. However the fact the Chinese administration is engaged in a massive transition from an investment and export oriented business model to one more supported by internal consumption, services and high technology cannot simply be ignored. 

Considering how much has been invested in basic resources, infrastructure and heavy industry they need a weaker currency to ease the way for what is one of the biggest and fastest economic transitions ever attempted. 

The Yuan has been trending lower against the US Dollar in a consistency manner since early 2014 and a sustained move below the trend mean would be required to question Dollar dominance. 

Meanwhile the mainland stock market has been ranging with a mild upward bias since hitting a medium-term low in January. The CSI 300 broke to new recovery highs two weeks ago and has now returned to test the region of the trend mean. It will need to continue to demonstrate support above 3200 if potential for continued higher to lateral ranging is to be given the benefit of the doubt.