The People’s Bank of China (PBOC) plans to set the USD/CNY reference rate at 7.1759. This rate, announced at around 0115 GMT, acts as a guide for how the yuan trades against other currencies, especially the US dollar.

Managed Floating Exchange Rate System

The PBOC uses a managed floating exchange rate system for the yuan. This system allows the currency to move within a certain range, or “band,” around an established midpoint, with a fluctuation of +/- 2%. Each morning, the PBOC determines this midpoint by looking at various factors, such as market supply and demand, economic indicators, and changes in international currency markets. The PBOC allows the yuan to move within a specified range around this midpoint, with a maximum increase or decrease of 2% in one trading day. If the yuan’s value approaches the limits of its trading band or becomes too volatile, the PBOC may intervene. This means they can buy or sell yuan in the foreign exchange market to stabilize its value. This managed system aims to help adjust the currency’s value in a controlled way, in sync with market conditions.

Currency Stability and Economic Factors

With the PBOC setting the USD/CNY midpoint at 7.1759, they are showing a commitment to maintain currency stability. This decision comes as we analyze the recent July 2025 economic data, which reported industrial production growth of 3.6%, slightly below expectations. This indicates that the central bank is acting to support the yuan amid underlying economic weaknesses. This situation is reminiscent of late 2023 and early 2024, when the economy also struggled. During that time, the PBOC consistently guided the yuan to a stronger value than market expectations to avoid a rapid decline. Their aim is to manage the currency’s direction rather than completely resist the overall trends. For those trading derivatives, this managed environment suggests that volatility in USD/CNY is likely to remain low in the coming weeks. A strategy of selling options to collect premiums could be effective, as the central bank’s actions may limit sudden swings in the spot rate. However, traders should remember that the 2% trading band carries risks if unexpected events arise. The ongoing pressure from interest rate differences—U.S. 10-year Treasury yields at 4.05% compared to China’s at 2.50%—still favors a stronger dollar. This creates persistent upward pressure on the USD/CNY pair. Traders might think about taking long forward positions but should remain patient, as the PBOC’s daily adjustments will slow any rapid increase. We should also keep an eye on the offshore yuan (CNH), which is currently priced slightly lower than the onshore (CNY) rate. A significant widening of the CNH-CNY spread could indicate growing market forces against the PBOC’s attempts to maintain stability and may hint at potential changes in the central bank’s policy. Create your live VT Markets account and start trading now.

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