The People’s Bank of China (PBOC) has set the USD/CNY reference rate at 7.0968 for the next trading session. This is lower than the previous rate of 7.0995 and also below the Reuters estimate of 7.1186. The PBOC’s main tasks include maintaining price stability and a stable exchange rate while fostering economic growth. It operates under the authority of the People’s Republic of China (PRC) and is influenced significantly by the Chinese Communist Party.

Monetary Tools Used by the PBOC

The PBOC uses several monetary tools, including the Reverse Repo Rate, Medium-term Lending Facility, Reserve Requirement Ratio, and Loan Prime Rate. The Loan Prime Rate is particularly important as it impacts borrowing costs and savings rates, which in turn affects the exchange rate of the Chinese Renminbi. China has 19 private banks, including well-known digital lenders like WeBank and MYbank. These banks began operating in a state-controlled financial sector after reforms in 2014 allowed private domestic banks to enter the market. The PBOC has indicated its intention to support the yuan by setting today’s reference rate stronger than market predictions. This action counters the negative sentiment that has developed over recent months. Traders should interpret this as a clear policy signal that the authorities are not comfortable with how quickly the yuan has been losing value.

Chinese Economic Policy Insights

We’ve seen this approach before, especially amid the economic challenges of 2023, when strong reference rates were used to discourage heavy betting against the currency. With China’s GDP growth for the third quarter recently reported at a steady 4.8% year-over-year, policymakers likely believe they can maintain currency stability. This warning suggests that aggressively shorting the yuan in spot or futures markets could be risky. The ongoing difference with the US Federal Reserve’s ‘higher for longer’ interest rate policy can lead to increased market volatility. Traders using derivatives should prepare for a period of erratic trading rather than a clear trend. Implied volatility for USD/CNY options is expected to rise, making strategies that benefit from this, like straddles, more attractive. In the upcoming weeks, buying call options on the USD/CNY pair could be riskier now that the PBOC has shown its strategy. Traders with long positions might want to look into purchasing downside protection, like puts, to protect against a possible policy-driven drop toward the 7.05 level. Though the costs of these options have likely risen, they provide a way to manage risks in an unpredictable market. Create your live VT Markets account and start trading now.

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