On Friday, the People’s Bank of China (PBoC) set the USD/CNY central rate at 7.0638, down from 7.0686 the day before. This change shows the PBoC’s commitment to keeping the exchange rate stable and supporting economic growth. The PBoC’s key goals are to maintain stable prices and carry out financial reforms to strengthen the financial market. It is a state-owned bank influenced by the Chinese Communist Party Committee Secretary.

Policy Tools Used by PBoC

The PBoC employs several policy tools, including the seven-day Reverse Repo Rate, Medium-term Lending Facility, foreign exchange interventions, and the Reserve Requirement Ratio. The Loan Prime Rate is China’s key interest rate, impacting loans, mortgages, and savings. In China’s financial system, there are 19 private banks, a small number compared to state-owned banks. Notable examples include WeBank and MYbank, digital banks linked to Tencent and Ant Group. Since 2014, China has allowed fully private banks to operate in its state-dominated financial sector. The People’s Bank of China strengthened the yuan today, setting the reference rate at 7.0638 against the dollar. This indicates that the central bank either supports or encourages yuan appreciation. For traders, this stronger rate signals a limit on any short-term dollar strength against the yuan. Supporting data backs this move, with China’s exports in November 2025 showing a 1.7% year-over-year increase, the first rise in six months. This follows a third-quarter GDP growth of 4.9%, which slightly exceeded expectations, indicating that the domestic economy is stabilizing. These positive figures give the central bank more flexibility to support the currency’s strength without risking economic recovery.

Market Implications and Trading Strategies

These policies fit into the global context, as markets now foresee a 75% chance of a US Federal Reserve rate cut by March 2026. A weaker dollar worldwide helps create a favorable environment for a stronger yuan. The dollar’s decline makes yuan-denominated assets more appealing. Looking back, this marks a significant change from the consistent yuan weakness seen through much of 2023 and 2024, when the rate was often above 7.25. The current drop below the 7.10 level suggests that the previous downward trend might be over. Traders should note that the policy landscape has shifted from a defensive stance to one of managed strength. In the coming weeks, selling out-of-the-money USD call options against the CNH could be a smart strategy to earn premium income. This central bank action is likely to lower implied volatility, indicating a clear intention to manage the exchange rate within a defined range. Betting on a sudden spike in USD/CNY contradicts this policy guidance. Traders holding long USD/CNY positions should consider hedging their risk. Opening new short positions in USD/CNY futures might also be advisable, following the clear direction from the PBoC. It’s usually unwise to oppose a central bank that is actively steering its currency in a specific direction, especially with improving economic data supporting its actions. Create your live VT Markets account and start trading now.

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