The People’s Bank of China (PBOC) has set the yuan’s daily midpoint at 7.1019 against the US dollar, which is lower than the expected rate of 7.1081. The previous closing rate was 7.1184. China’s central bank uses a managed floating exchange rate system. This allows the yuan to change within a range of +/- 2% around the midpoint rate. Recently, the PBOC injected 230 billion yuan through 7-day reverse repos at an interest rate of 1.40%.

Net Injection

The net injection totals 41.7 billion yuan. The PBOC has shown it wants to slow down the yuan’s decline by setting a stronger reference rate than expected. This move suggests that expecting the yuan to weaken quickly in the near future may be a risky bet. It sends a clear message from the authorities aimed at stabilizing market sentiment. For derivative traders, this action may lower implied volatility for USD/CNY options. The central bank’s involvement hints at a limit on the exchange rate, making it less likely for the pair to rise significantly in the upcoming weeks. This situation makes selling option premiums, particularly on upside calls, a more appealing strategy.

Pressure on the Yuan

This strong reference rate comes at a crucial time, as the onshore yuan has weakened over 4% against the dollar so far this year. This pressure stems from a slow recovery in the property market and a significant interest rate gap with the US, where the Federal Reserve has kept rates steady through the summer. The PBOC’s actions are clearly in response to these economic pressures. Looking back, between mid-2022 and late 2023, the central bank regularly set strong daily fixes to defend the 7.30 level. This historical trend supports today’s actions and suggests a sustained effort to stabilize the currency. Traders should be prepared for similar interventions if the yuan faces renewed pressure. Additionally, the liquidity injection indicates that the PBOC is trying to support the economy while preventing the currency from dropping. This dual strategy means that, although the yuan may find some support, the ongoing weaknesses in the domestic economy will continue to apply pressure. As a result, we can expect a range-bound market rather than a full reversal of the trend. Given these circumstances, we should explore strategies that make the most of a capped upside in the USD/CNY exchange rate over the next month. Selling low-delta call spreads on USD/CNY could effectively benefit from the PBOC’s defensive position. This approach allows us to earn from both time decay and the central bank’s attempts to limit yuan weakness. Create your live VT Markets account and start trading now.

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