The People’s Bank of China (PBOC) has set the USD/CNY central rate at 7.0995 for the upcoming trading session. This is a minor change from the previous rate of 7.1021 and is lower than the Reuters estimate of 7.1281.

Monetary Policy Tools

The PBOC aims to keep prices stable, including exchange rates, and to support economic growth through financial reforms. It is a state-owned bank under the People’s Republic of China, influenced by the Chinese Communist Party. To achieve its goals, the PBOC uses several monetary policy tools, such as the seven-day Reverse Repo Rate, Medium-term Lending Facility, and the Reserve Requirement Ratio. The Loan Prime Rate also affects interest rates for loans, mortgages, and savings, which in turn influences the Renminbi exchange rates. China has 19 private banks, including digital lenders like WeBank and MYbank, backed by tech companies such as Tencent and Ant Group. Since 2014, private funds have been allowed to create fully capitalized domestic banks in a sector mainly dominated by the state. The People’s Bank of China set the yuan’s reference rate stronger than expected at 7.0995. This decision comes even as data shows China’s GDP growth for Q3 has slowed to 4.8% and manufacturing has stalled. This indicates an effort to prevent the currency from weakening further despite economic challenges.

Exchange Rate Stability

This reinforces the idea that the central bank’s main focus is on keeping the exchange rate stable, a trend we observed during economic slowdowns in 2023 and 2024. By setting strong daily rates, the PBOC is signaling that it will not tolerate significant yuan depreciation. Traders should not anticipate a rapid fall in the currency, even if economic data worsens. This strong guidance suggests that short-term fluctuations in USD/CNY may be limited. Derivative traders might explore strategies that benefit from steady trading ranges, such as selling short-term options strangles or straddles. However, a sudden economic shock could force the PBOC to change its strategy. For now, betting against their determination seems risky. In the coming weeks, we will keep an eye on any adjustments to key policy rates, like the Loan Prime Rate (LPR) or the Reserve Requirement Ratio (RRR). The US Federal Reserve’s recent decision to maintain interest rates due to ongoing 3.1% inflation continues to support a strong dollar, putting additional pressure on the PBOC. Any unexpected rate cuts in China could challenge the central bank’s commitment to a stable yuan. Create your live VT Markets account and start trading now.

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