The People’s Bank of China (PBOC) has set the USD/CNY reference rate at 7.1385, which is lower than the expected 7.1503. The previous closing rate was 7.1547. This reference rate is part of China’s managed floating exchange rate system, allowing the yuan to move within a 2% range around a central rate. In other news, the PBOC added 331 billion yuan into the market through seven-day reverse repos at an interest rate of 1.40%. Today, 211.5 billion yuan will mature, leading to a net outflow of 119.5 billion yuan from the market. These actions are important for maintaining liquidity and ensuring stability.

Central Banks Currency Management

The actions of the central bank clearly indicate they are managing the yuan’s decline. By setting the reference rate stronger than expected, they aim to prevent the currency from weakening too fast. This indicates they are establishing a solid floor for the yuan’s value. This isn’t just a one-time event; it fits into a broader trend we’ve observed. Throughout May 2024, China’s monetary authority has consistently set the daily midpoint over 1,000 pips stronger than market forecasts, showing a strong commitment to stability. We believe this pattern will continue, helping to anchor market expectations and counter speculative pressure. For derivative traders, betting on a sharp decline of the yuan poses high risks in the coming weeks. Ongoing interventions create an environment where strategies that profit from low volatility or stable currency pairs might be wiser. The central bank seems to be effectively providing insurance against a currency collapse, which traders can leverage. The economic landscape supports this managed approach. Recent data shows a mixed picture that requires intervention. China’s trade surplus grew to $82.62 billion in May 2024, as exports surpassed imports, which supports the yuan. However, weak domestic demand remains a challenge, indicating the need for official guidance to maintain currency stability.

Historical Context And Market Impact

Historically, this careful and transparent guidance contrasts sharply with the sudden 2015 devaluation, which shocked global markets. The current strategy aims to avoid panic and foster stability by managing the exchange rate instead of allowing it to drop freely. This historical difference suggests that predictable, managed actions are the preferred policy tool at this moment. As a result, we’ve seen implied volatility for one-month USD/CNH options decrease from earlier highs, showing that the market expects a lower chance of a sudden breakout. While the PBOC’s actions provide clear guidance, traders should remain aware of comments from figures like Mr. Trump about potential tariffs. These external factors could still introduce unexpected volatility. Create your live VT Markets account and start trading now.

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