The People’s Bank of China (PBOC) has set the yuan’s daily midpoint at 7.1494 against the US dollar, compared to earlier estimates of 7.2062. This midpoint is part of a managed floating exchange rate system, meaning the yuan can vary within a +/- 2% range around this central rate. The previous closing rate was 7.2000. Additionally, the PBOC performed a transaction involving 283.2 billion yuan through 7-day reverse repos, with an interest rate of 1.40%. With 331 billion yuan maturing today, this indicates a net drain of 47.8 billion yuan.

China And US Trade Discussions

Chinese state media has reported that trade talks with the United States continue to face structural issues. More updates are expected soon, along with China’s Purchasing Managers’ Index (PMI) figures. The PBOC is sending a strong signal by setting the yuan at a firmer rate than expected. This challenges the market’s view that the currency will weaken. For traders in derivatives, this shift presents a significant short-term opportunity against current economic trends. Despite this maneuver, the overall economic picture remains weak. Recently, China’s Q2 GDP growth for 2025 was reported at 4.8%, just below the government’s 5.0% target. This follows a trend of softer data seen through the spring. Additionally, export figures for June 2025 showed a 3% decline compared to the previous year, reflecting the effects of ongoing trade tensions. However, the PBOC has reasons for wanting a stable or stronger yuan, likely to reduce capital outflows and control inflation. There have been net foreign inflows into Chinese government bonds for two consecutive months, totaling over $15 billion in Q2 2025, suggesting that this policy is working. Furthermore, China’s June Consumer Price Index slightly exceeded expectations at 2.1%, giving the bank another reason to prevent currency weakness from raising import prices.

Yuan Strength Strategy

The tension between policy and economic fundamentals is causing implied volatility in USD/CNY options to rise, recently reaching a three-month high. Traders should think about buying volatility through strategies like straddles or strangles. These approaches profit from significant price changes in either direction, which seems likely given the current situation. In the coming weeks, it might be wise to follow the PBOC’s policy by using short-dated options to bet on continued yuan strength below the 7.20 level. However, over a few months, weaker economic data suggests that this strength may not last. Longer-dated call options on USD/CNY could serve as a good hedge against the currency eventually facing pressures from fundamentals. We must also remember the PBOC’s history of sudden policy changes, such as the unexpected devaluation in August 2015. This aggressive fixing serves as a reminder that the central bank can resist market trends for an extended period. History indicates that going against the PBOC in the short term poses risks, even if the long-term outlook appears clear. Create your live VT Markets account and start trading now.

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