The People’s Bank of China (PBOC) has set today’s USD/CNY reference rate at 7.1522, which is lower than the expected rate of 7.1784. This happens in a managed floating exchange rate system where the yuan can move within a +/- 2% band around the midpoint. The yuan was last closed at 7.1758. Today, the PBOC injected 170.7 billion yuan through 7-Day Reverse Repos at a rate of 1.4%. With 226.2 billion yuan expiring today, there’s a net drain of 55.5 billion yuan in Open Market Operations. Additionally, the Loan Prime Rates remain unchanged, with the 1-year rate at 3% and the 5-year rate at 3.5%.

China 2025 Rare Earth Quotas

In a separate development, China has released its 2025 rare earth quotas. This move shows an increase in control over the supply chain that is critical for electric vehicles. For more insights and analysis, visit investingLive.com. The central bank’s reference rate surprise sends a clear message to the market. It’s a calculated effort to slow down the yuan’s decline and show that authorities won’t accept a fast sell-off. Betting on a significant drop in the currency now goes against a committed policymaker. The bank has positioned the midpoint above survey expectations for over a month, creating a clear defensive trend. This approach is sensible given the mixed economic data from May, which indicated a 3.7% rise in retail sales but ongoing struggles in property investment. This uneven recovery calls for caution instead of overwhelming stimulus. By draining liquidity through open market operations while keeping key lending rates steady, the bank emphasizes stability over aggressive easing. This measured approach contrasts with the panic responses seen during past crises, like the major devaluation in 2015, indicating a desire to avoid disorderly outcomes. Consequently, we believe a broad market rally based on immediate stimulus might not happen soon.

Options Strategy for USD/CNY

In response, we think selling out-of-the-money call options on USD/CNY is a strong strategy. This position benefits from the central bank’s actions, which help create a ceiling on the exchange rate, likely reducing volatility and allowing traders to earn premium. The implied policy support makes it less likely for the rate to exceed 7.25 in the short term. For equity derivatives, the absence of a rate cut could slow the recent surge in Chinese stocks, especially in the Hang Seng Index, which has jumped over 15% since April’s lows. We suggest that traders consider buying protective put options on broad market ETFs. This serves as a hedge against fading optimism as the market adjusts to this cautious policy. The subtle move to control rare earth quotas introduces a specific geopolitical risk for global supply chains, particularly in the EV sector. This may lead to targeted volatility in companies that depend heavily on these materials. We recommend looking at options on individual tech or automotive companies that may be disproportionately affected by this supply-chain pressure. Create your live VT Markets account and start trading now.

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