On Thursday, the People’s Bank of China (PBOC) set the USD/CNY central rate at 7.1102, an increase from 7.1055 before the holiday. This change was lower than a Reuters estimate of 7.1484. The PBOC, which is owned by the Chinese state, is not an independent entity. Its main goals include stabilizing prices and exchange rates while encouraging economic growth.

Key Monetary Policy Tools

The PBOC uses different monetary policy tools compared to Western economies. These tools include the seven-day Reverse Repo Rate, the Medium-term Lending Facility, and the Reserve Requirement Ratio. The Loan Prime Rate also plays a role in setting market loan rates and exchange rates. China’s financial system has 19 private banks, including WeBank and MYbank, which are backed by Tencent and Ant Group. The information here is for educational purposes only and does not include investment advice. Financial instruments come with risks, including the potential loss of principal. The People’s Bank of China has set the daily reference rate for the yuan at 7.1102 against the dollar, which is much stronger than the market expected. This indicates a clear intention from the authorities to prevent the yuan from weakening too quickly. It serves as a deliberate attempt to stabilize the currency in the face of broader market uncertainty. This action likely responds to ongoing economic pressures in China, especially in the property sector, which has faced challenges since the crisis began in 2023. Property investment has dropped by nearly 9.8% year-over-year in the most recent quarter. Authorities aim to maintain currency stability to prevent capital outflows, as a stable yuan is essential for overall financial confidence.

Economic Strengths and Trade Resilience

Despite challenges, the Chinese economy has strengths that provide some flexibility for the central bank. Recent data shows that exports remain robust, leading to a trade surplus of over $75 billion last month. This ongoing surplus ensures a steady inflow of foreign currency, which helps support the yuan. For traders focusing on derivatives, this strong official guidance suggests that the upside for the USD/CNY pair may be limited in the coming weeks. Selling call options on USD/CNH with strikes around 7.18 to 7.20 could be a good strategy to collect premiums from expected range-bound trading. The central bank has indicated that it is uncomfortable with significant moves above this range. The main risk to this outlook would be a sudden strengthening of the US dollar, perhaps due to an unexpected resolution of the current US government shutdown or unfavorable economic data from China. To mitigate this risk, using defined-risk strategies like a call credit spread would be wiser than selling uncovered calls. This strategy allows us to capitalize on the idea that the yuan will remain stable while strictly limiting potential losses. Create your live VT Markets account and start trading now.

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