The People’s Bank of China (PBOC) determines the daily midpoint for the yuan, also known as the renminbi or RMB. The bank uses a managed floating exchange rate system, allowing the yuan’s value to vary within a set range of +/- 2% around a central reference rate. Today, the midpoint is 7.1414, the highest level since last November. The previous closing value was 7.1695.

PBOC Injects Liquidity

The PBOC also injected 150.5 billion yuan through 7-day reverse repos at an interest rate of 1.40%. With 520.1 billion yuan maturing today, this results in a net drainage of 369.6 billion yuan from the financial system. The PBOC’s decision to set the reference rate significantly stronger than the market expected sends a clear policy signal. This is the strongest setting in over six months and shows the bank’s concerns over the yuan’s recent weakness. Traders should see this as an attempt to stabilize the exchange rate and discourage negative bets against the currency. This intervention happens against a backdrop of economic challenges, especially in the property sector. Recent data from China’s National Bureau of Statistics revealed that new home prices dropped 3.9% year-over-year in April 2024, marking the fastest decline in nearly a decade. A stable currency can help prevent capital flight and restore confidence when domestic growth is weak. While supporting the exchange rate, regulators also drained a large amount of liquidity from the financial system. This dual strategy suggests a desire to stabilize the yuan without broad monetary easing, which could lead to inflation or excessive credit growth. It indicates a preference for targeted measures rather than flooding the market with cash.

Implications For Traders

For derivative traders, this means the upside potential in the USD/CNY pair is limited in the short term. Selling out-of-the-money call options or using bear call spreads on the pair is a smart approach. The implied volatility for USD/CNH options, currently around historic lows of 3.5%, is likely to stay low due to these official actions. Historically, strong fixings like this often lead to periods of currency stability or strength. For example, in the second half of 2023, similar strong fixings helped maintain the 7.30 level and resulted in a months-long rally for the yuan. This pattern suggests that the current actions may help create a solid support level for the currency. Despite this, the interest rate gap between the U.S. and China, still over 3 percentage points, poses challenges for the yuan. However, the PBOC’s strong position means forward points are unlikely to indicate a sharp decline. This situation makes holding long USD positions financed in CNY less attractive, potentially unwinding some carry trades. Create your live VT Markets account and start trading now.

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