The People’s Bank of China (PBOC) oversees the value of the yuan in a floating exchange rate system. The exchange rate is maintained within a range of +/- 2% of a central reference rate called the “midpoint.” The last closing value of the yuan was 7.1815. Additionally, the PBOC injected 122 billion yuan via 7-day reverse repos at an interest rate of 1.40%.

Today’s Economic Actions

Today, 126 billion yuan are set to mature, leading to a net liquidity drain of 4 billion yuan. Today’s activities show that the central bank aims to keep currency markets stable. The small net drain of 4 billion yuan indicates a neutral stance, meaning there isn’t an immediate plan to change the money supply significantly. We can expect continued management without sudden policy changes. The 7-day repo rate of 1.40% is low, supporting the accommodating policies seen over the past year to help the economy. Recent data shows that consumer inflation in July 2025 was just 0.5%, giving the PBOC room to keep borrowing costs low without triggering inflation.

Yuan Stabilization Strategy

For derivative traders, it looks like the yuan will stay within a tight range. With the last close at 7.1815 and the PBOC setting strong reference points, there’s a clear effort to keep the yuan from falling below 7.20-7.25 per dollar. This has led to lower implied volatility for USD/CNY options, which is much less than the peaks seen during the market chaos of 2022. The US Federal Reserve is a key external factor, having kept interest rates steady at its meeting last month in July 2025. This ongoing difference in policies between the US and China helps support the US dollar, limiting any potential strength of the yuan. Even though China’s exports for July 2025 unexpectedly rose by 3.2%, the interest rate gap is still the dominating factor. In the coming weeks, a potential strategy is to sell short-dated USD/CNH option strangles. This approach benefits from low volatility and keeps the currency pair within a stable channel, which matches the PBOC’s current goal. We expect the yuan to trade steadily between 7.15 and 7.25. Given the modest GDP growth of 4.8% in Q2 2025, we think authorities will continue to prefer a stable or slightly weaker yuan to support the economy. If there are sudden drops in the USD/CNY rate due to market sentiment, it could be a good opportunity to enter long positions. We view any dips toward the 7.15 level as chances to bet on a return to the upper end of the recent range. However, we must not forget the unexpected devaluation in August 2015, reminding us that the PBOC can act suddenly. Ongoing weakness in the property market poses a risk that could lead to a shift in this stability policy. Cautious traders should consider using stop-losses to safeguard their positions. Create your live VT Markets account and start trading now.

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