The People’s Bank of China (PBOC) controls the yuan, also known as the renminbi (RMB). The central bank uses a managed floating exchange rate system, allowing the yuan’s value to fluctuate within a set range around a benchmark rate called the midpoint. Currently, this range is set at plus or minus 2%. The last closing rate for the yuan was 7.1829. The PBOC injected 118.5 billion yuan through 7-day reverse repos at an interest rate of 1.40%.

Tightening Liquidity

Today, 138.5 billion yuan will mature, resulting in a net removal of 20 billion yuan from the financial system. On August 13, 2025, the PBOC is sending a clear signal by pulling 20 billion yuan out of circulation. This indicates a preference for tighter liquidity, which can help support the yuan and stop it from weakening. This action is important, especially since the yuan recently approached the 7.20 level against the dollar last week. The previous closing rate of 7.1829 shows ongoing pressure, and this liquidity squeeze acts as a defense mechanism. We have seen similar strategies before, particularly when defending the 7.30 level in late 2023. The PBOC faces challenges from overseas, as the recent US jobs report for July 2025 was surprisingly strong, boosting the dollar. This creates upward pressure on the USD/CNY pair, conflicting with the PBOC’s efforts to stabilize the yuan. The tension between a hawkish Federal Reserve and a stability-focused PBOC will be key in the upcoming weeks.

Strategic Stability Messaging

For derivative traders, this suggests a phase of managed stability rather than significant changes. Selling options volatility in USD/CNH may be a smart approach, as the PBOC is expected to use its daily midpoint fixing to limit sharp movements. Implied volatility for one-month options has already decreased to 4.1% from a recent high of 4.5%, indicating this expectation. Recent data also backs this view, with China’s July 2025 exports posting only a modest 1.5% year-over-year increase. Weak external demand suggests a significantly stronger yuan is unlikely, reinforcing the idea of a currency that stays within a certain range. The PBOC is striving for stability without harming the export sector. Traders should closely monitor the daily yuan midpoint fixing. Any major deviation from market expectations will provide insight into the PBOC’s next step. Currently, betting on the yuan to stay within a tight range of 7.15 to 7.22 seems sensible. Create your live VT Markets account and start trading now.

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