China Weakens Yuan by Largest Degree Since 2012 ( #AAPL )

These 100-yuan notes are worth less Monday, after the People's Bank of China made a big change in the daily reference rate. Reuters

China's central bank weakened the daily reference rate for its currency by the largest percentage in more than a year and half, as it continues to fight capital inflows and as sluggish economic data sends jitters through the market.

The People's Bank of China set the daily reference rate Monday at 6.1312, 0.18% higher than Friday's 6.1201, the largest one-day change since July 2012.

The U.S. dollar-Chinese yuan pair was fixed "much higher than what the market environment would have otherwise suggested," said Sacha Tihanyi, a senior currency strategist at Scotiabank in Hong Kong. This suggests, he said, that the pair is heading back to the weak levels the yuan hit against the greenback a few weeks ago.

Mr. Tihanyi says this isn't policy makers' reaction to Saturday's weak trade data but an element of the central bank's financial overhaul, aimed at making the exchange rate more market-driven.

The disappointing inflation and trade deficit data out of China over the weekend wasn't surprising and reflects seasonality, analysts and strategists said. Exports plummeted, pushing the world's second-largest economy to post a $22.9 billion monthly deficit, its first since early last year. Imports, however, were up 10.1% from a year earlier, pointing to undamaged Chinese demand.

"We aren't surprised by the trade deficit in February, as China used to record a deficit in February or March in recent years and we don't think there is a big chance China will post a deficit again in March," said Huang Yi, head of currencies and commodities of China Guangfa Bank.

Mr. Huang says while the deficit has changed some investors' and institutions' short-term expectations, the selloff in the yuan wasn't overwhelming. The "two-way" movement will persist in the short run, he said.

Analysts note volatility in the currency has risen dramatically over the past few weeks from record lows, after the yuan spooked market participants with an unexpected 1.3% tumble.

On Monday, the yuan touched 6.1458 against the dollar and the offshore yuan, which is freely traded outside China, dropped to 6.1265 from 6.1095 on Friday.

Some say while the weekend's economic data didn't drive the reference rate, Chinese policy makers have taken it as an opportunity to prompt caution in the market and shake out speculators who have driven money into China.

"We expect that the trade figures will be more real in the coming months as the [yuan] has become much more volatile and less predictable than before," economists At ANZ bank wrote in a note on March 8. "The narrowing onshore-offshore interest-rate spread will help to deter the 'hot money' inflows to take advantage of the high onshore yields."

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