The People’s Bank of China (PBOC) has set the USD/CNY central rate at 7.0019 for the upcoming trading session. This is slightly higher than yesterday’s rate of 7.0014 and above the Reuters estimate of 6.9697. The PBOC’s main goals are to keep prices stable, manage exchange rates, support economic growth, and push for financial reforms. To achieve these goals, the central bank uses several tools, including the seven-day Reverse Repo Rate, the Medium-term Lending Facility, the Reserve Requirement Ratio, and the Loan Prime Rate.

China’s Banking Sector

The state owns China’s central bank, with the Chinese Communist Party Committee Secretary influencing its management. Currently, there are 19 private banks in China, including digital banks like WeBank and MYbank. In 2014, China allowed private banks to join its primarily state-controlled financial sector. Although there are not many of them, these private banks play a small role in the financial system. The People’s Bank of China has set the yuan’s reference rate lower than expected, crossing the important 7.00 mark against the dollar. This move shows a willingness to allow the currency to depreciate, likely to support the economy. It suggests we should adjust our short-term currency strategies. This decision aligns with recent economic data. Full-year GDP growth for 2025 is projected at 4.8%, which is below the government’s target. Additionally, December’s export data showed a slight year-over-year decline, and the latest Caixin Manufacturing PMI is just above 50, indicating weak expansion. These figures explain why authorities might prefer a weaker yuan to boost the competitiveness of Chinese goods abroad.

Central Bank Policy Direction

Remember the central bank’s actions in late 2025 when it lowered the Reserve Requirement Ratio for major banks to increase liquidity in the market. Today’s currency fixing seems to follow that accommodative policy. This trend suggests that further yuan weakness is possible and part of a broader support strategy for the economy. In the coming weeks, we should consider preparing for a higher USD/CNY rate. This could involve buying USD call options or CNH put options to benefit from a potential upward movement while managing our risk. The difference between the market estimates and today’s fix is a strong indication that we should be cautious about holding onto the yuan right now. Now that the 7.00 level has been crossed in the daily fix, we should watch for resistance around the 7.10 mark, a level tested back in 2024. Expect increased volatility in the pair as the market reacts to this policy signal. We will seek opportunities in instruments like vanilla options or forward contracts that could benefit from this potential trend. Create your live VT Markets account and start trading now.

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