The People’s Bank of China (PBOC) manages the daily midpoint for the yuan, also known as the renminbi or RMB. China uses a managed floating exchange rate system that allows the yuan to fluctuate within a range of +/- 2% around this central rate. Recently, the PBOC set the midpoint at 7.1108, stronger than the estimated rate of 7.1559. This is the strongest position for the yuan since November last year. Additionally, the PBOC injected 379.9 billion yuan through 7-day reverse repos at an interest rate of 1.40%.

Net Drain in the Financial System

On this day, 616 billion yuan will mature, resulting in a net drain of 236.1 billion yuan from the financial system. Today, August 27, 2025, the PBOC has clearly indicated its intention by setting the yuan’s reference rate significantly stronger than expected. This strong fixing signals that the authorities will not accept a rapid drop in the currency’s value. We can expect a period of stability in the USD/CNY exchange rate. This move aligns with last month’s economic data. In July 2025, industrial production grew by 3.1%, below the expected 3.5%, and capital outflow indicators showed nearly $20 billion leaving the country. A strong currency fixing helps to address these negative trends and reduce speculative bets against the yuan.

Implications for Traders and Speculators

For options traders, this implies that the implied volatility in USD/CNY may be too high in the short term. Last week, the 1-month implied volatility index for the offshore yuan (CNH) reached 6.8%, a high not seen since early 2025. A strategy like selling straddles or strangles to earn premium might be effective, as the central bank is likely to maintain a tighter trading range soon. Traders holding long positions in USD/CNY should reconsider this approach, as opposing a strong central bank can be risky. Instead, looking for relative value trades, such as buying other Asian currencies against the dollar, could be wise. A stable yuan often benefits the whole region, just as a weakening yuan in late 2024 harmed the Korean won and Thai baht. The current net drainage of liquidity, despite the strong fixing, is a strategic move to raise the cost of shorting the yuan. By making overnight funding in the offshore CNH market more expensive, it deters speculators and reinforces the central bank’s message. This strategy proved effective during the turbulent times of 2023 and 2024 in curbing depreciation pressures. Create your live VT Markets account and start trading now.

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