The People’s Bank of China, which is the central bank, sets the daily midpoint for the yuan, also known as the renminbi. China operates with a managed floating exchange rate system. This allows the yuan to fluctuate within a range of +/- 2% around the midpoint. Today, the USD/CNY reference rate is set at 7.1395, which is different from the estimated 7.1774. The previous closing rate was 7.1930. In addition, the central bank injected 544.8 billion yuan through 7-day reverse repos at a rate of 1.40%. With 495.8 billion yuan maturing today, this leads to a net injection of 49 billion yuan.

Important Move by the People’s Bank of China

Today, August 4th, 2025, the People’s Bank of China is sending a strong message. The midpoint fix of 7.1395 is much stronger than what the market expected, indicating a clear intent to stop the yuan’s recent decline. This move effectively sets a boundary against further depreciation. This action follows weeks of pressure on the yuan, as it was nearing the 7.20 level against the dollar. The pressure came from disappointing Chinese export data for July 2025 and a strong US dollar after inflation figures from last week were higher than anticipated. The bank is now actively addressing these market conditions. For traders in derivatives, this strong midpoint suggests that short-term implied volatility in USD/CNY options may be overvalued. One-month implied volatility, which had risen above 5% in late July, is likely to decrease now as the central bank shows commitment to stability. This creates an opportunity to sell yuan volatility, as the chances of a sudden drop have been intentionally lowered.

Currency Strategy and Market Implications

We’ve seen a similar approach before, especially during the yuan’s prolonged weakness in 2023 and 2024. The PBOC consistently used strong midpoint fixes to shape market expectations and prevent a cycle of further depreciation. History indicates that when they send such a strong signal, they are likely to maintain it for a while to restore confidence. Given this position, holding long USD/CNY positions is now much riskier in the coming weeks. A more cautious strategy would involve range-trading styles, like selling strangles or iron condors. These strategies would benefit from the expected period of lower volatility and stable prices. The net liquidity injection of 49 billion yuan provides additional support. It helps keep onshore money market rates stable without indicating a major change in broader monetary policy. This reinforces the idea that the PBOC’s main goal right now is currency stability. Create your live VT Markets account and start trading now.

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