The People’s Bank of China (PBOC) has set the central rate for the USD/CNY at 7.1366, which is stronger than the expected 7.1667. This is part of China’s managed floating exchange rate system, allowing the yuan to move within a +/- 2% range around the central rate. The previous close for the yuan was at 7.1800. To boost the economy, the PBOC has injected 160.7 billion yuan through 7-day reverse repos at a rate of 1.40%. However, since 449.2 billion yuan is maturing today, this leads to a net reduction of 288.5 billion yuan.

Looking Ahead

On Tuesday, August 5, 2025, Asia’s economic calendar will highlight China’s services PMI. In a bold move today, August 5, 2025, the People’s Bank of China set the yuan’s reference rate significantly stronger than expected. This suggests a strong effort to halt the yuan’s recent drop against the dollar. It’s more than just a small adjustment; it directly counters current market trends. This decision comes amid disappointing economic performance, as Q2 2025 GDP growth came in at 4.5%, below expectations. Additionally, China’s July export data showed a 3% year-over-year decline, indicating weak external demand. These economic signs usually point to a weaker yuan, creating tension between policy decisions and actual economic conditions.

Policy Divergence

Further complicating the situation is the ongoing difference in policies between the U.S. and China. The Federal Reserve has kept a strict stance through mid-2025, with U.S. interest rates above 5%, making the dollar more favorable. This has been a main reason for the rising USD/CNY pair throughout the year. We’ve seen similar strategies before, especially in the summer of 2023, when strong rate settings were used to slow the yuan’s decline. While that approach managed to slow depreciation, it didn’t completely change the trend until the economic data improved. This history suggests the PBOC’s current actions might only limit the yuan’s decline for now. For derivative traders, this clash between policy and economic fundamentals is likely to increase implied volatility in USD/CNY options in the coming weeks. The central bank is indicating a strong position, raising chances for sudden changes in the exchange rate. This makes strategies like buying straddles, which benefit from large price movements in either direction, more attractive. Given the PBOC’s firm stance, making outright bets on further yuan weakness has become riskier. A safer strategy would be to sell out-of-the-money call options on USD/CNY. This approach allows traders to earn a premium while betting that the central bank will succeed in keeping the pair from rising much higher in the short term. Attention will now focus on the upcoming Caixin Services PMI data for more direction. A strong result would support the PBOC’s move and could lead to a significant rally in the yuan. On the other hand, a weak result would put more pressure on the currency and challenge the central bank’s strategy. Create your live VT Markets account and start trading now.

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