The People’s Bank of China (PBOC) manages the daily midpoint for the yuan, also called the renminbi or RMB. It uses a managed floating exchange rate system, allowing the yuan to vary within a range of +/- 2% around a central rate. Recently, the midpoint was set at 7.1998. The central bank added 126 billion yuan through 7-day reverse repos at an interest rate of 1.40%.

Liquidity Management

Today, 789.3 billion yuan is set to mature, which means there will be a net liquidity drain of 663.3 billion yuan. This is part of the PBOC’s strategy to manage liquidity in the financial system. This large liquidity drain of 663.3 billion yuan is a strong signal. It tightens financial conditions and likely aims to strengthen the yuan. The exchange rate is just below 7.20 against the dollar, indicating a desire to hold that level. We’ve seen this strategy in action, especially during the summer months of 2023 and 2024, when the yuan faced similar pressures. During that time, the PBOC used daily fixes and open market operations to mitigate the currency’s decline against a strong US dollar. This history shows they’re drawing a line again.

Economic Indicators

This tightening occurs alongside mixed economic data for July 2025. The latest official manufacturing PMI dropped to 49.9, suggesting slight contraction, while the non-manufacturing PMI rose to 51.0, signaling growth. This uneven recovery complicates the PBOC’s task of supporting the currency without hindering fragile growth. For derivative traders, this situation creates rising implied volatility. The tension between the PBOC’s tightening measures and disappointing economic indicators may lead to greater price fluctuations. Strategies like buying option straddles on USD/CNY can be beneficial, as they profit from significant moves in either direction. In the short term, the liquidity drain should help stabilize the yuan. We might consider selling near-term call options on USD/CNY with strike prices around 7.22 or 7.25. This assumes that the central bank’s actions will effectively limit further currency weakness in the coming weeks. However, we should be cautious about the yuan’s long-term outlook. A liquidity drain does not address underlying economic issues, and the interest rate gap with the US remains a significant challenge. If export or credit data is disappointing, the downward trend for the currency could re-emerge. Create your live VT Markets account and start trading now.

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