The People’s Bank of China (PBOC) set the USD/CNY central rate for Friday at 7.0949. This is a bit lower than the previous rate of 7.0968 and below the Reuters estimate of 7.1154. The PBOC works to keep prices and exchange rates stable while also supporting economic growth and financial reforms. It is state-owned by the People’s Republic of China and guided by the Chinese Communist Party.

Monetary Policy Tools

The PBOC uses several monetary policy tools, including the Reverse Repo Rate, Medium-term Lending Facility, foreign exchange interventions, and the Reserve Requirement Ratio. The Loan Prime Rate serves as the benchmark interest rate, helping to set loan and mortgage rates in the market. China allows private banks to operate, including 19 financial institutions like digital lenders WeBank and MYbank, which are backed by tech giants Tencent and Ant Group. In 2014, the government opened the financial sector to private lenders that were previously dominated by the state. The PBOC has shown a strong commitment to support the yuan by setting today’s reference rate higher than expected. This suggests authorities are not comfortable with further weakness in the currency and want to make that clear. For those trading derivatives, this raises the risk of holding short yuan positions since the central bank is working against that trend. This decision comes amid China’s recent economic data, which showed that Q3 2025 GDP growth reached 4.8%, exceeding forecasts. This strong performance gives the PBOC a reason to push the currency higher and address earlier capital outflow pressures. This is a change from the persistent weakness of the yuan seen in much of 2024 when economic data was less reliable.

Impact on USD CNY Volatility

This policy move will likely reduce volatility in the USD/CNY pair in the coming weeks. Thus, strategies that benefit from low volatility, such as selling short-dated strangles or straddles, may be advantageous. The PBOC’s firm stance makes a sudden drop in the yuan less likely, limiting the potential gains for USD/CNY call options. Historically, the PBOC has effectively used its policy tools to manage the currency, particularly during times of dollar strength. The Federal Reserve’s decision to hold rates steady in September 2025 has kept the dollar strong, and this firm rate set by the PBOC is a direct response to that situation. We can expect the central bank to keep using its daily rate fix to counteract market pressures seeking a weaker yuan. Traders should keep an eye on the PBOC’s other policy tools, like the Medium-term Lending Facility (MLF), for additional clues. If the central bank maintains a strong stance on the currency while ensuring enough liquidity in the banking system, it would indicate confidence in domestic stability. Any unexpected changes in key rates would quickly change this outlook. Create your live VT Markets account and start trading now.

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