The People’s Bank of China (PBOC) has set the USD/CNY midpoint at 7.1409, which is lower than the estimate of 7.1797. This value allows the yuan to fluctuate within a range of +/- 2% from this central point. The last closing rate for the yuan was 7.1834 against the dollar. In its recent monetary activity, the PBOC injected 138.5 billion yuan through seven-day reverse repos at an interest rate of 1.40%.

Net Liquidity Drain

Today, as 309 billion yuan matures, there will be a net liquidity drain of 170.5 billion yuan. This action fits with the central bank’s managed floating exchange rate system. The PBOC has clearly indicated its position by setting the yuan’s reference rate much stronger than expected. Today’s rate of 7.1409 was a notable 388 pips away from market forecasts, showing a strong intent to prevent further depreciation of the yuan. This is a response to the recent softness that brought the yuan close to 7.20 against the dollar. This decisive action comes at a time when economic signs appear to be weakening, as the official July manufacturing PMI for 2025 reported a slight contraction at 49.8. The robust fixing likely aims to maintain currency stability and deter speculative capital outflows amid these conditions. The authorities seem to be focusing on stability rather than allowing market forces to dictate currency value for the moment. Meanwhile, the central bank’s drain of 170.5 billion yuan from the financial system tightens short-term liquidity, making it more costly for speculators to borrow yuan to bet against it. This strategy fits well with the strong currency fixing, providing a dual defense for the renminbi.

Managing Currency Strength

We’ve seen this strategy before, especially in several months of 2023 when the PBOC consistently offered strong guidance to offset market negativity. Past data suggests that going against the central bank’s determined actions can be an expensive gamble. Therefore, we can expect this managed strength to continue in the coming weeks. For options traders, this unexpected intervention has likely led to an increase in the implied volatility of USD/CNY options. This offers a chance to sell premium, such as using short-dated call spreads, betting that the PBOC will effectively set a ceiling on the pair. The risk is a sudden policy change, but the message today is clear. In the weeks ahead, we should be careful about maintaining or starting new long USD/CNY positions through forwards or swaps. The costs associated with these positions may increase, and the central bank is actively working to undermine their profitability. It would be wise to reduce exposure or consider hedges against a potential decline in the exchange rate. Traders should closely watch the daily fixes for confirmation of this new defensive approach. If the PBOC continues to set the midpoint stronger than estimates, it will reinforce their commitment. A return to market-driven fixes would indicate that this was just a temporary warning. Create your live VT Markets account and start trading now.

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