The People’s Bank of China (PBOC) plans to set the USD/CNY reference rate at 7.1274, according to a report by Reuters. This rate is the daily midpoint for the yuan against various currencies, especially the US dollar, within the trading system. The PBOC operates a managed floating exchange rate system. This allows the yuan to fluctuate within a 2% range above or below the midpoint. Each morning around 0115 GMT, the PBOC establishes this midpoint, taking into account market demand, economic data, and movements in global currencies.

Exchange Rate Management

Under this system, the yuan can rise or fall by up to 2% from the midpoint each day. The PBOC can step in to stabilize the currency if it approaches the limits or if there are significant fluctuations, ensuring smoother changes in the yuan’s value. The expected USD/CNY midpoint of 7.1274 indicates that the PBOC is signaling a stronger yuan. This change shows growing confidence, especially since Q2 2025 GDP figures were stable at 5.1%, surpassing market predictions. This marks a clear improvement from the weaker levels seen throughout much of 2023 and 2024, when the currency consistently traded above 7.20. Considering the currency’s management within the 2% band, this stronger rate suggests limited potential for the USD/CNY pair to rise in the short term. We see this as a chance to sell volatility, as the central bank is unlikely to allow sharp, unexpected drops from this new level. One-month implied volatility for USD/CNY has already decreased to 3.8%, and selling out-of-the-money call options on the pair could be beneficial.

Market Implications

This trend is supported by a general weakness in the US dollar. Recent US inflation data for July 2025 showed a calm rate of 2.7%. This has raised speculation that the Federal Reserve will keep interest rates steady for the rest of the year. This situation allows the PBOC to strengthen the yuan without conflicting with global market trends. Therefore, traders should be cautious when considering long positions on the USD/CNY pair, as both domestic policies and international factors could hinder progress. Reflecting on the property market issues from 2023 and 2024, the current policy seems aimed at attracting foreign investment by showing stability. While the interest rate difference still favors holding dollars, the yuan’s appreciation could soon offset that advantage. We expect traders to slowly start building positions that benefit from the yuan’s gradual strengthening over the coming weeks. Create your live VT Markets account and start trading now.

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