The People’s Bank of China (PBOC) has set the USD/CNY reference rate at 6.9678 for Friday. This is lower than the previous rate of 6.9771 and differs from Reuters’ prediction of 6.9459. The PBOC focuses on maintaining stable prices and boosting economic growth. It is state-owned, with leadership influenced by the Communist Party of China. Pan Gongsheng currently serves in a key role within the PBOC.

Monetary Policy Tools

The PBOC uses various monetary policy tools, including the seven-day Reverse Repo Rate, Medium-term Lending Facility, and the Reserve Requirement Ratio. The main interest rate, known as the Loan Prime Rate, influences loan, mortgage, and savings rates, which in turn affect the Renminbi’s exchange rate. While China’s financial sector allows some private banks to operate, they represent a small part of the market. There are 19 private banks, including WeBank and MYbank, which are linked to tech companies Tencent and Ant Group. Private banks were first allowed in 2014, introducing private funds into the mainly state-run sector. Recently, the People’s Bank of China has been guiding the Yuan to strengthen against the US dollar, as seen in today’s fixing. This aligns with new data pointing to a cautious economic recovery. For example, industrial production in December 2025 exceeded expectations, growing 5.1% year-over-year, marking a change from the weaker performance of the previous year.

US Dollar Dynamics

The trend of a stronger Yuan is also supported by a weaker US dollar outlook. Markets are now predicting a greater than 60% chance of a US Federal Reserve rate cut by the third quarter of this year. This difference in policy between the two central banks puts downward pressure on the USD/CNY exchange rate. Traders may want to consider a strategy that anticipates ongoing, but controlled, Yuan strength. Buying USD/CNH put options or put spreads can help profit from a declining exchange rate while managing risk. This cautious approach is wise given the central bank’s tendency to stabilize currency fluctuations, as seen during 2025’s volatility. The noticeable difference between the official fixing and market expectations indicates tension in the currency market. This suggests long volatility strategies, like purchasing straddles on USD/CNH, could be wise in the upcoming weeks. Such positions would benefit if future economic data causes significant fluctuations in either direction. Corporate treasurers dealing with US dollar payments should see this as a chance to secure better exchange rates through forward contracts. On the other hand, exporters earning in US dollars should consider increasing their hedging efforts. This will help protect their future earnings from further Yuan appreciation. Create your live VT Markets account and start trading now.

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