The People’s Bank of China (PBOC) has set the dollar-to-yuan (USD/CNY) reference rate at 7.1056. This is lower than the estimated rate of 7.1213. The PBOC operates a managed floating exchange rate system, allowing the yuan to fluctuate within a +/- 2% band around a central reference point known as the “midpoint.” Currently, the rate of 7.1029 is the strongest for the yuan since November 6. The previous closing rate for the yuan was 7.1246 against the dollar.

Yuan Devaluation Prevention

The strong fixing of the yuan shows the PBOC’s intention to prevent any further depreciation. This indicates that the central bank is taking a firm stance against those betting on the yuan’s decline. For now, selling USD/CNY seems to be the preferred strategy. This move follows China’s Q2 2025 GDP growth, which was slightly below expectations at 4.7%, pressuring the currency over the summer. However, surprisingly strong export data for August 2025 likely boosted the confidence of policymakers to strengthen the yuan. They aim to create stability to attract foreign investment. For options traders, this strong defense of the yuan is expected to reduce volatility. The implied volatility on USD/CNH options has already dropped below 5%. We noticed a similar trend in late 2023 and 2024 when the central bank took similar actions. Therefore, selling strangles or straddles on USD/CNH to collect premium could be a good strategy.

Investment Strategies

This strong signal suggests that buying put options on USD/CNY is a smart way to bet on further yuan strength. Given the central bank’s influence, a safer approach would be using put spreads, which can profit from a gradual decrease in the currency pair towards the 7.05-7.10 range. This situation is also tied to recent global data, such as the US inflation report for August 2025, which showed a milder-than-expected rate of 3.1%. This provides some relief from a strong dollar, giving the PBOC an opportunity to act. A stable yuan may encourage interest in yuan-funded carry trades if US interest rates seem to have peaked. Additionally, this stability should support currencies that depend on China’s economic health, like the Australian dollar. We could see AUD/USD strengthen as worries about a chaotic yuan devaluation diminish. Positions that are long on the Australian dollar could be a good trade related to this trend. Create your live VT Markets account and start trading now.

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