The People’s Bank of China (PBOC) sets the daily midpoint for the yuan, also known as the renminbi (RMB). The currency operates under a managed floating exchange rate system, allowing it to fluctuate within a band of +/- 2% around a central reference rate. Today, the PBOC set the USD/CNY midpoint at 7.1108, which is better than the expected rate of 7.1476. The last closing rate was 7.1390, showing a change in the currency’s value.

Reverse Repos and Interest Rate

The PBOC also pumped 229.1 billion yuan into the market through 7-day reverse repos at an interest rate of 1.40%. With 379.9 billion yuan maturing today, this leads to a net withdrawal of 150.8 billion yuan from the market. The strong yuan fixing at 7.1108, much better than the market estimate of 7.1476, clearly signals the policymakers’ intent. This suggests they are trying to address recent weaknesses in the yuan and set a lower limit for its value. Traders should see this as a sign that the central bank will work to prevent the yuan from losing significant value soon. Given this support, selling call options on USD/CNY with strike prices above 7.20 may be a wise choice. This strategy profits if the yuan remains stable or strengthens, taking advantage of the central bank’s involvement. Their action effectively limits the potential rise of the US dollar against the yuan in the upcoming weeks. This strong management of the exchange rate is expected to reduce volatility. As the central bank strives for stability, the implied volatility in options markets might be too high. We believe selling straddles or strangles is a good idea, betting that the currency pair will trade within a narrower range than the market expects.

Market Context and Historical Precedent

This move follows a steady weakening of the yuan in July and August 2025, mainly due to worries about China’s property sector and a strong US dollar. Recent data showed foreign investors sold more Chinese equities than they bought last month, leading to over $8 billion in outflows, which pressured the currency. The central bank is clearly responding to these market conditions. In late 2023, we saw authorities use a similar strategy to defend the 7.30 level, which successfully stabilized the market. This past experience lends credibility to the current actions. The strong signal is also a reaction to the Federal Reserve’s decision to keep US interest rates high, which has generally strengthened the dollar this year. The simultaneous net withdrawal of 150.8 billion yuan from the banking system emphasizes a focus on currency stability rather than broad monetary easing. This suggests we should not expect any cuts to key policy rates that might weaken the yuan soon. For derivatives traders, this indicates stable or slightly higher short-term interest rates in China, affecting the pricing of forward contracts. Create your live VT Markets account and start trading now.

here to set up a live account on VT Markets now