On Wednesday, the People’s Bank of China (PBOC) set the USD/CNY central rate at 7.0754, down from 7.0794 the day before. The PBOC aims to keep prices stable, support economic growth, and reform financial markets. The PBOC is owned by the state of China and is not an independent institution. The Chinese Communist Party Committee Secretary, chosen by the State Council Chairman, plays a key role in guiding and managing the bank.

Monetary Policy Tools

The PBOC uses several monetary policy tools that are different from those in Western countries. These include the seven-day Reverse Repo Rate, Medium-term Lending Facility, foreign exchange interventions, and Reserve Requirement Ratio. The Loan Prime Rate is the main interest rate that affects loans, mortgages, and Renminbi exchange rates. China allows private banks, but there are only 19, making up a small part of the overall financial system. The largest are WeBank and MYbank, supported by Tencent and Ant Group. In 2014, China permitted fully capitalized domestic banks to operate in the state-dominated sector. Today, the People’s Bank of China has set the yuan at a slightly stronger rate of 7.0754 against the US dollar. This indicates that policymakers prefer stability over economic stimulus. It suggests they are satisfied with current economic conditions and are not aiming for a weaker currency. This stronger rate is significant, especially after China’s Caixin Manufacturing PMI for November 2025 reported a weak 50.2, pointing to a fragile recovery. The central bank seems more focused on managing capital flows and building market confidence instead of using the exchange rate to boost exports. This indicates tight control over the currency.

Implications for Traders

Recently, the USD/CNY rate has remained stable between 7.05 and 7.15 for most of the last quarter of 2025. This is a major shift from the volatility experienced in 2023 when the rate exceeded 7.30. The current policy aims to prevent a return to that instability. For derivative traders, this means implied volatility in USD/CNY options is likely to stay low for now. Selling short-dated option strangles to collect premium could be a useful strategy if the currency remains within this range. This method benefits from the reduced price movements. However, we must stay alert to external risks, particularly any unexpected policy changes from the US Federal Reserve, which has kept a hawkish stance. A cost-effective way to protect against sudden instability is to buy far out-of-the-money USD/CNY call options, which could gain value if there is a sudden decline in the yuan. We should keep an eye on the PBOC’s other policies, as the daily fix is just one part of the overall picture. Watch for the upcoming decision on the Medium-term Lending Facility (MLF) rate this month. A surprise cut would suggest a broader easing policy, likely weakening the yuan despite daily signals. Create your live VT Markets account and start trading now.

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