The People’s Bank of China (PBOC) set the yuan (CNY) reference rate at 7.1405 to the US dollar today, which is stronger than the expected rate of 7.1845. The PBOC uses a managed floating exchange rate system, allowing the yuan to fluctuate within 2% of this midpoint. The previous closing rate was 7.1799. The PBOC also injected 112 billion yuan through 7-day reverse repos at a rate of 1.40%. However, 544.8 billion yuan will mature today, leading to a net outflow of 432.8 billion yuan in the financial system.

Currency Stability Over Export Boost

The People’s Bank of China is clearly indicating that it won’t allow the yuan to weaken excessively. By setting a stronger reference rate, the bank is pushing back against depreciation pressures. This suggests that, in the coming weeks, the USD/CNY exchange rate is likely to be capped by policymakers. This approach comes even as economic data shows some slowdown. For instance, the July 2025 manufacturing PMI fell to 49.2, indicating contraction. This suggests the PBOC is prioritizing currency stability instead of letting the yuan weaken to support struggling exports. The ongoing net liquidity drain highlights the bank’s focus on maintaining financial order rather than stimulating the economy broadly. For derivative traders, this is a warning against betting heavily on a weaker yuan. Strategies based on long USD/CNY call options now come with significant policy risks, so it may be wise to reduce such positions. Selling out-of-the-money call spreads on USD/CNY could be a smart way to take advantage of the expectation that upside is now limited.

Implications For Traders And Markets

Policy can be unpredictable, as we saw after the surprise devaluation in August 2015. However, today’s actions seem aimed at discouraging speculation and preventing a chaotic decline. This strong guidance will likely reduce short-term volatility in the currency pair. An artificially stronger yuan poses challenges for China’s export-driven companies, which could impact equity markets. This pressure may be seen in derivatives related to the Hang Seng China Enterprises Index (HSCEI). Traders might consider buying put options on these indices to hedge against potential earnings weakness in export-focused firms. On the flip side, a stronger currency boosts China’s purchasing power for important imports. This could temporarily benefit commodities like copper and crude oil, which have seen their prices decrease recently due to concerns about Chinese demand. Call options on these commodities may present a tactical opportunity if this policy remains in place. Create your live VT Markets account and start trading now.

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