The People’s Bank of China (PBOC) set the USD/CNY central rate at 7.0187 for trading today, which is up from 7.0173. The PBOC’s goals are to keep prices stable, including exchange rates, and to boost economic growth through financial reforms. The PBOC is a state-owned bank in China, guided by the Chinese Communist Party. Mr. Pan Gongsheng plays a key role in managing the bank’s policies.

Monetary Policy Tools

The PBOC uses various tools for monetary policy that are different from those in Western economies. These include the seven-day Reverse Repo Rate, the Medium-term Lending Facility, foreign exchange interventions, and the Reserve Requirement Ratio. The Loan Prime Rate is important because it affects loans, mortgages, and savings, which also influences the exchange rate. China has 19 private banks, such as WeBank and MYbank, supported by tech companies like Tencent and Ant Group. Private banks were allowed to operate after reforms in 2014, enabling private capital to enter China’s financial sector, which had mainly been under state control. The PBOC’s choice to set the USD/CNY reference rate weaker than expected indicates that authorities are okay with a declining yuan. This rate of 7.0187 was against an estimate of 6.9896. This signals to us that the yuan may weaken further in the near future. This policy change likely comes from recent economic data from late 2025. In December, China’s exports dropped for the third month in a row, falling 1.8% year-over-year. Q4 GDP growth was also lower than expected at 4.9%. A weaker currency can make Chinese products cheaper and more competitive globally, which can help the manufacturing sector.

Market Reactions

At the same time, the U.S. Dollar has remained strong. Minutes from the Federal Reserve’s December 2025 meeting showed they are still focused on controlling inflation. This difference between a loosening PBOC and a stricter Fed increases the pressure on the USD/CNY pair. This trend is happening in many currency pairs, not just the yuan. For those trading derivatives, we may see more volatility in the weeks ahead. It might be wise to consider options strategies, such as strangles or straddles on USD/CNH, which could profit from a surprising price move in either direction, although the trend seems to favor yuan weakness. This unexpectedly weak rate opens the door for a stronger trend to develop. Looking back, we noted the yuan fell past 7.30 against the dollar during economic stress in 2022 and 2025. While we are not at that point yet, the current signals suggest that testing the 7.10 level is becoming more likely. A solid break above the 7.05 level could attract more momentum traders and accelerate the yuan’s decline. We should also keep an eye on the PBOC to potentially use other tools, like cutting the Reserve Requirement Ratio (RRR) or the Medium-term Lending Facility (MLF) rate. If January’s export numbers do not improve, the chances of such moves before the end of the first quarter will rise significantly. This would add more pressure on the yuan and support the current trading outlook. Create your live VT Markets account and start trading now.

here to set up a live account on VT Markets now