On Tuesday, the People’s Bank of China (PBOC) set the USD/CNY reference rate at 7.0348, an increase from the previous rate of 7.0056. This rate is higher than the earlier Reuters estimate of 7.0112. The PBOC’s main goals are to keep prices and exchange rates stable while supporting economic growth. It is a state-owned institution influenced by the Chinese Communist Party, with Mr. Pan Gongsheng in a key leadership position.

Monetary Tools Used by the PBOC

The PBOC uses various monetary tools, including a seven-day Reverse Repo Rate and the Medium-term Lending Facility. The Loan Prime Rate is a crucial benchmark that affects loan costs, savings, and the value of the Renminbi. Private banks in China are few in number, with only 19 operating. WeBank and MYbank, backed by tech giants Tencent and Ant Group, are among the notable ones. China allowed fully private-funded domestic banks to operate starting in 2014. The PBOC’s recent setting of the yuan’s reference rate at 7.0348 indicates a willingness to allow further depreciation. This move, which was weaker than what the market expected, suggests we might see increased volatility as 2025 comes to a close. Traders should rethink any short volatility positions in this currency. This decision likely shows the PBOC’s concern about China’s economic performance, which has struggled during 2025. Recent data has been disappointing, with Q3 GDP growth at 4.6%, below target, and high youth unemployment rates. A weaker currency can help make Chinese exports more competitive and support the economy.

Impact on Derivative Traders

For those dealing in derivatives, the recent jump in the fixing has caused implied volatility to rise. One-month USD/CNH options volatility increased by over 12% in early trading. This makes strategies that benefit from price swings, like buying straddles, more appealing now. The market is anticipating bigger price movements, and traders should adjust their strategies accordingly. If this signals a new trend, buying USD/CNY call options could be a good way to profit from continued yuan weakness. Conversely, companies relying on Chinese imports should urgently review their hedging strategies. This is a critical time to use forward contracts or options to secure costs before the yuan potentially weakens further into early 2026. This pattern has been seen before during economic slowdowns in 2019 and 2022, when the PBOC allowed the yuan to drop below the key level of 7.0 against the dollar. Historically, breaching this level has often led to managed depreciation. Past behavior suggests the PBOC may guide the currency lower but will intervene to prevent chaotic declines. The effects of this will go beyond the currency pair itself, so it’s important to keep an eye on related markets such as the Australian dollar and commodity futures. A weaker yuan may indicate decreased domestic demand from China, which could lower prices for industrial metals like copper and iron ore. These interconnected markets could also provide insights into the Chinese economy. Create your live VT Markets account and start trading now.

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