The People’s Bank of China (PBOC) sets the daily midpoint for the yuan, also known as the renminbi. It uses a managed floating exchange rate system that allows the yuan to move within a +/- 2% range around a central rate. Today, the exchange rate is 7.1337, the strongest level since November 6, 2024, compared to the previous close of 7.1775.

PBOC’s Monetary Action

Today, the PBOC injected 128.7 billion yuan through 7-day reverse repos at an interest rate of 1.40%. However, since 160.7 billion yuan is maturing today, this results in a net drain of 32 billion yuan. The strong fixing of the yuan today deviates significantly from the previous close. This indicates the People’s Bank of China is responding to recent currency weakens. The move to strengthen the yuan suggests that betting on a weaker yuan is now riskier. Traders in derivatives should rethink any strategies that profit from a rising USD/CNY. This strong stance establishes a temporary ceiling for the currency pair, making long positions on USD/CNY spot or call options less appealing in the short term. This action likely responds to recent economic data, as China’s Q2 2025 GDP growth was 4.8%, slightly below expectations. We view this strong fix as a move to maintain financial stability and prevent capital outflows due to growth concerns. This approach is common when economic data is weak.

Historical Context and Strategy

Looking back, we saw similar actions in 2023 when the PBOC defended the 7.30 level. That led to weeks of stable trading and lower volatility. This history suggests the central bank may maintain its stronger position for a while. With the Federal Reserve keeping interest rates steady in their July 2025 meeting, the interest rate difference between the U.S. and China still favors the dollar. This makes the PBOC’s strong action today particularly significant, as it counters market pressures and shows commitment to stability. For options traders, this suggests selling short-term volatility. One-month implied volatility for USD/CNY, which had been around 4.2%, is likely to decrease as the central bank enforces a tighter trading range. The small net liquidity drain today aligns with this policy and clarifies the bank’s intentions. Create your live VT Markets account and start trading now.

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