The People’s Bank of China (PBOC) manages the yuan using a controlled floating exchange rate system. This allows the currency to fluctuate within a narrow range around a central reference rate, currently set at +/- 2%. Recently, the PBOC set the USD/CNY central rate at 7.1027, slightly lower than the market estimate of 7.1159. The previous close was 7.1175. The PBOC also introduced 287 billion yuan through 7-day reverse repos at an interest rate of 1.40%, resulting in a net injection of 40 billion yuan into the financial system.

Central Bank Signals Support

The PBOC’s stronger yuan fixing is a clear sign that it wants to support the currency and prevent significant weakness. This move helps manage capital flows and projects stability amid market pressure. Therefore, we should be careful about betting on a sharp yuan depreciation in the near future. For our FX options strategy, we see potential in selling USD/CNY call options with a strike price well above the current level. The PBOC is essentially capping the dollar’s strength against the yuan, which helps reduce volatility and allows us to collect a premium. This strategy worked well during similar interventions in 2023 when defending the 7.30 level. These actions follow recent data showing a steady net capital outflow of $15 billion from China’s financial markets in August 2025. Additionally, industrial production data for Q3 2025, released last week, was 3.9%, slightly below expectations. The PBOC’s move today is likely a response to this data, aiming to boost investor confidence before it declines further.

Interest Rate Strategy

At the same time, the net liquidity injection indicates that the authorities are not looking to tighten domestic financial conditions. This step aims to keep short-term borrowing costs low to support the economy. This dual approach reflects a policy of external strength and internal support. In the interest rate swap market, this situation creates an opportunity as policies should keep short-term rates stable. We recommend a yield curve steepener trade, where we receive fixed on short-dated swaps and pay fixed on longer-dated ones. Short-term rates will likely remain low due to liquidity injections, while longer-term rates have more potential to rise. Overall, the conflicting policy objectives suggest that the USD/CNY pair will likely stay within a managed range in the coming weeks. We should focus on strategies that benefit from this stability, like option selling and relative value trades on the interest rate curve. Making directional bets on a major currency breakout seems risky until the PBOC signals a change in its approach. Create your live VT Markets account and start trading now.

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