The People’s Bank of China (PBOC) has set the yuan’s daily midpoint at 7.1064 against the US dollar, lower than the estimated rate of 7.1390. The previous close was at 7.1401. The PBOC uses a managed floating exchange rate that allows for a fluctuation of plus or minus 2%. Additionally, the PBOC injected 188.3 billion yuan into the market through 7-day reverse repurchase agreements at an interest rate of 1.40%. However, the net result was a withdrawal of 594.6 billion yuan. Earlier reports hinted that the PBOC might increase liquidity in the money markets this month.

Yuan Withdrawal Strategy

This week, the PBOC completed a net withdrawal of 1.2 trillion yuan from the banking system. This is the largest withdrawal in two months, carried out through open market operations. Today’s yuan fixing at 7.1064 is much stronger than expected, showing a clear aim to support the currency. This decisive action indicates that authorities are determined to prevent further yuan depreciation. For traders, this suggests that the USD/CNY rate is unlikely to rise in the short term. This strategy is further supported by recent data: China’s August exports unexpectedly grew by 1.5% year-over-year, contrary to predictions of a decline. With the US Federal Reserve hinting at a pause last week, the global situation favors a stronger yuan. This gives the central bank a solid reason to justify its actions beyond just market reactions.

Impacts on Financial Conditions

Meanwhile, the significant liquidity drain of 1.2 trillion yuan this week is making borrowing more expensive in China. This discourages bets against the yuan and adds extra support for the currency. We should see this as a tactic to push short sellers out, even as reports of possible future injections create some uncertainty. We’ve seen this approach in the past, especially during the pressures of 2023 when the central bank often used the daily fixing to counter market weaknesses. This history shows a strong commitment to stability, suggesting that this isn’t just a temporary measure but a strategic move. It boosts our confidence that the 7.15-7.20 range will be a solid ceiling for now. Given these conditions, consider option strategies that could profit from limited upside in the US dollar against the yuan. Selling out-of-the-money USD call options against the offshore yuan (CNH) is an effective way to earn premium, assuming the currency pair stays within a cap. This is a more cautious strategy compared to buying puts since it benefits from both stability and yuan strength. Create your live VT Markets account and start trading now.

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