During the Annual Central Economic Work Conference, Chinese officials focused on keeping the Yuan’s exchange rate stable. They also highlighted the need for a manageable fiscal deficit and efforts to boost grain production to maintain reasonable food prices. China aims to improve its local tax system and enhance governance around AI. While these announcements were made, there wasn’t any significant impact on the Chinese Yuan. However, the USD/CNY pair hit a new yearly low at around 7.0574 due to a weaker US Dollar.

Central Economic Work Conference Focus

The Central Economic Work Conference’s goal of a stable Yuan suggests that officials will likely intervene to prevent major currency fluctuations. This means that implied volatility in the USD/CNY pair might decrease, making it less appealing to buy options that benefit from big price changes. Looking back, we saw similar interventions in late 2024 that managed to reduce volatility for several months. The Yuan has recently gained strength against the dollar mainly due to the weakness of the US Dollar, not due to Chinese policy changes. Recent US data shows Initial Jobless Claims rose to 236,000, and with November’s inflation figures coming in lower than expected, the market is now expecting a higher chance of Federal Reserve rate cuts in 2026. This trend is likely to keep the USD/CNY exchange rate under pressure. Given this situation, a strategy of selling out-of-the-money call options on USD/CNY could be beneficial in the coming weeks. This approach could be profitable if the pair remains stable or continues to gradually decline because of the weak dollar. We believe the Chinese commitment to stability will prevent sudden increases in value, which would keep the exchange rate capped.

Monitoring and Strategic Views

Traders should keep a close eye on the People’s Bank of China’s daily reference rate for the Yuan, as this is their main tool for signaling intentions. Historically, when they set the fix stronger than what the market expects, it indicates a policy aimed at strengthening the currency or at least managing its decline against the dollar. This offers a clear daily signal that supports a negative outlook on the USD/CNY pair for the remainder of the year. Create your live VT Markets account and start trading now.

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