The People’s Bank of China (PBOC) has set the USD/CNY central rate at 7.1418, which is much stronger than the expected 7.1901. The previous closing rate was 7.1881. The PBOC uses a managed floating exchange rate, allowing the yuan to fluctuate within a +/- 2% range around this central rate. Additionally, the PBOC injected 114.6 billion yuan through 7-day reverse repos at a rate of 1.40%. On the same day, 160.7 billion yuan in reverse repos matured, leading to a net drain of 46.1 billion yuan.

Yuan Support Strategy

The new central rate is a strong message that officials are actively working to support the yuan. Setting it at 7.1418 shows their intent to combat yuan weakness. Therefore, investors should be cautious about holding long US dollar positions against the yuan in the short term. This unexpected move could raise options costs as implied volatility increases. Traders might want to sell USD/CNY call options with strike prices above 7.20, as the central bank has indicated this level is strong resistance. This strategy bets that the PBOC will keep the yuan from weakening past this point soon. This action comes as the economy shows signs of slowing. Recent data from July 2025 reported a 3% drop in exports compared to last year. A stable currency helps stop capital outflows. In the second quarter of 2025, a net outflow of nearly $49 billion was recorded, raising concerns. The strong fix aims to project stability despite weak economic indicators.

Historical Patterns

We saw a similar approach of aggressive fixing in the third quarter of 2023 when the yuan faced pressure. The PBOC’s actions back then set a ceiling for the USD/CNY pair, benefiting traders betting against further yuan depreciation. History shows that when the difference between the fix and estimates is this significant, the central bank is serious about maintaining a certain level. The modest net drain of liquidity from the banking system strengthens this stance. It indicates that authorities are not flooding the market with cash, which would contradict their efforts to support the currency. This makes their commitment to defend the yuan more credible. Over the next few weeks, we can expect the USD/CNY to trade within a tighter range, influenced by the central bank’s daily fixes. This environment makes trend-following strategies less appealing and favors selling options to collect premiums. We will keep an eye on the daily fix for any changes in this defensive position. Create your live VT Markets account and start trading now.

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