The People’s Bank of China has set the onshore yuan reference rate for the upcoming trading session at 7.1460, which is better than the expected rate of 7.1635. This reference rate allows the yuan to trade within a range of plus or minus 2% each day. The offshore yuan, however, has no such limits. The stronger rate suggests the PBOC is sending a clear message about stabilizing the currency. This new rate marks an increase of 175 points from previous estimates and is the highest since November 8 of last year, compared to the previous closing figure of 7.1707.

PBOC’s Market Actions

Additionally, the PBOC injected 214.8 billion yuan through a 7-day reverse repurchase agreement at a rate of 1.4%. After accounting for the 87.1 billion yuan maturing today, there is a net withdrawal of 127.7 billion yuan. The PBOC’s strong setting indicates a strategy to stop the recent decline of the yuan. This action suggests a temporary ceiling on the USD/CNY exchange rate. Traders should therefore reconsider their bets on further yuan weakness. This decision is supported by positive signs in the economy. China’s Caixin Manufacturing PMI has expanded quickly, reaching 51.7 in May—the fastest growth in nearly two years. This indicates that authorities believe the economy can handle a stronger currency, providing a strong basis for the central bank’s firm stance. For options traders, the central bank’s stronger guidance aims to reduce currency volatility. This could make selling USD/CNH volatility a more appealing strategy. We expect a more stable trading range, which may not favor those holding long options premium.

Strategic Investment Opportunities

The difference in policies between the PBOC and other central banks creates opportunities for investment, especially against the Japanese yen. As the Bank of Japan continues a relaxed policy, being long on the offshore yuan and short on the yen could take advantage of this widening gap, aligning with the central banks’ opposing actions. A stronger currency can also help attract foreign investment. Global investors have been increasing their holdings of Chinese onshore bonds for the ninth consecutive month through May. This policy enhances the attractiveness of Chinese assets and suggests ongoing inflows will support the currency. Historically, unexpectedly strong yuan fixings, like those in 2017, often indicate the start of a stable or appreciating currency phase. This is not just a single event but could signal a new direction for policy in the coming weeks. Create your live VT Markets account and start trading now.

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