China's large currency devaluations appear to be over for now, but the yuan is expected to gradually depreciate, which will also put downward pressure on the Aussie dollar.
Last week, the People's Bank of China moved the trading mid-point of the yuan 4.4 per cent lower, in three devaluations of more than one per cent, in an effort to boost demand for the nation's exports.
However, on Friday the PBoC raised the mid-point by 0.05 per cent and by another 0.01 per cent on Monday.
That's because China last week also changed the way it sets the daily reference rate to a more market-oriented calculation method.
Previously, authorities based the rate on a poll of market-makers. But now, they will also take into account the previous day's close, foreign exchange supply and demand, and the rates of major currencies.
Westpac senior currency strategist Sean Callow said the smaller moves and the new fixing regime will make the PBoC's rate setting more predictable and will soothe market nerves.
The Australian dollar dropped as much as one US cent on the first two days of the significant yuan devaluations.
"The near flat-line trade in US dollar-Chinese yuan cross rate in local trade Friday followed by another dip into the close suggests that, for now at least, the PBoC wants to further calm nerves," he said.
AMP Capital chief economist Shane Oliver said that further depreciation in the yuan, also called the renminbi, is likely but that the large devaluations are over.
"China has a big trade surplus, is growing its share of global exports and the PBoC has indicated it only wanted to see a three per cent or so fall and described talk of a 10 per cent fall as `nonsense'," he said.
"For Australia, a lower renminbi should be seen as good news, ultimately. Cheaper Chinese exports will boost demand for them which, in turn, will boost demand for our raw materials. But, again, this is marginal."
Commonwealth Bank currency strategist Richard Grace said the Australian dollar will come under pressure from the lower yuan, as well as from factors such as lower commodity prices and higher US interest rates.
"If Asian currencies are under general downward pressure, so is the Australian dollar against the US dollar," he said.
"Some 76 per cent of Australia's exports are direct to Asia, and the Australian dollar is often used as a proxy for Asia."
The Commonwealth Bank forecasts that the Aussie dollar will fall to 72 US cents by the end of the year, from its current level of just below 74 US cents.
However, the CBA says the Aussie will rise to 4.86 yuan, from its current level at just above 4.7 yuan.
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