The People’s Bank of China (PBOC) has set the USD/CNY reference rate at 7.1085 today, which is slightly lower than the expected rate of 7.1113. This reference rate is important in China’s managed floating exchange rate system, where the yuan can change within a range of +/- 2% around the midpoint. Yesterday, the closing rate was 7.1057. The PBOC also injected 487 billion yuan through 7-day reverse repos at an interest rate of 1.40%, leading to a net injection of 195 billion yuan into the financial system.

PBOC Intervention

The central bank’s choice to set a stronger yuan reference rate than the market expected sends a clear message. This appears to be a strategy to ease depreciation concerns and stop the currency from weakening too fast. This action follows the US Federal Reserve’s recent hawkish comments, making the PBOC’s efforts to support the yuan even more important. This policy is happening amid mixed economic reports from last week. While China’s industrial output in August showed some strength, retail sales and new home prices have not performed well. This situation highlights the need for supportive actions like the significant liquidity injection seen today. The government is focused on maintaining domestic stability, which includes keeping the currency stable.

Implications For Traders

For traders dealing in derivatives, this active management means that implied volatility in USD/CNY will likely stay low in the coming weeks. We have seen similar patterns before, especially during the 2022-2023 period, where such interventions limited currency fluctuations and benefited volatility sellers. Strategies that take advantage of a stable currency, like selling strangles, may work well. Given the ongoing pressure for a weaker yuan due to large US-China interest rate differences, any directional bets should be made carefully. We suggest using call spreads on USD/CNY instead of buying outright calls. This approach allows for gradual gains while protecting against potential losses if the PBOC continues to defend these levels. Create your live VT Markets account and start trading now.

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