The People’s Bank of China (PBOC) sets the daily midpoint for the yuan, also known as the renminbi or RMB. The yuan’s value can fluctuate within a limit of plus or minus 2% around this midpoint in a managed floating exchange rate system. The last recorded value for the yuan was 7.1809. The PBOC has injected 187.5 billion yuan through 7-day reverse repos, keeping the interest rate at 1.40%.

Monetary Stimulus and Its Impact

The injection of 187.5 billion yuan aims to ease financial conditions and help the domestic economy. Such monetary stimulus usually puts downward pressure on the currency’s value, making it less appealing to hold. For traders, this suggests the yuan could face challenges in the upcoming weeks. It’s important to monitor the daily midpoint setting, which signals the central bank’s policy intentions. The PBOC has been consistently setting this reference rate stronger than market predictions to prevent rapid depreciation. This creates a situation where authorities accept some weakness in the yuan but will combat any chaotic selling. This approach is influenced by tough economic data. China’s official manufacturing Purchasing Managers’ Index (PMI) unexpectedly fell to 49.5 in May, indicating reduced factory activity and highlighting the need for more stimulus. Consequently, the bank focuses on supporting the domestic economy, even if it complicates efforts to maintain a stable exchange rate.

Avoiding Market Volatility

The memory of the 2015 devaluation, which led to global market volatility due to a sudden drop, shapes the current cautious approach. The aim is to prevent another shock by allowing a slow, controlled decline instead of a sharp fall. This history shows a strong preference for stability over abrupt market changes. Given these conflicting forces, traders should not bet on a dramatic fall in the currency’s value. It is wiser to consider options for a gradual depreciation, such as selling out-of-the-money calls on the dollar-yuan pair to earn premium. The +/- 2% band will likely be maintained, making strategies that benefit from stable price movements and low volatility more sensible than outright shorting. Create your live VT Markets account and start trading now.

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