The People’s Bank of China (PBoC) has set the USD/CNY reference rate at 7.0078, which is higher than the previous rate of 7.0064. This new rate is also above a Reuters estimate of 6.9722. The PBoC aims to keep prices and exchange rates stable while supporting economic growth. It is a state-run bank influenced by the Chinese Communist Party Committee Secretary.

PBoC Policy Tools

The PBoC utilizes various tools, such as: – The seven-day Reverse Repo Rate – Medium-term Lending Facility – Foreign exchange interventions – Reserve Requirement Ratio The Loan Prime Rate serves as China’s benchmark interest rate, affecting loans, mortgages, and savings rates. China allows private banks, including digital lenders like WeBank and MYbank, to operate. Since 2014, private capital has fully funded some domestic banks, enhancing the country’s financial sector. The PBoC’s decision to set the yuan’s reference rate at 7.0078 signals a willingness to allow a weaker currency to boost the slowing economy. Traders should be ready for the PBoC to make the yuan weaker if the next economic data is disappointing. Recent figures from late 2025 show that industrial production and export growth are slowing down. For example, China’s trade surplus in December 2025 shrank to $69.5 billion, below expectations and less than the previous year’s figure. This indicates stress on the export sector. A weaker yuan makes Chinese products cheaper, which can help these industries.

Impacts on Volatility and Market Strategy

As a result, currency volatility is rising. One-month implied volatility on USD/CNY options has increased to over 5%, up from last week’s 4.3%. This situation favors options strategies like long straddles that can profit from large price swings in either direction. Traders may want to buy volatility, as the central bank’s actions add uncertainty to the yuan’s near-term direction. Historically, the 7.00 level has been a significant psychological mark for this currency pair. Breaking through this level often indicates a new phase of depreciation, leading us to anticipate moves toward the 7.10-7.15 range seen during previous economic hardships. Traders can use this history to consider trending strategies, such as buying call options on USD/CNY or selling the offshore yuan (CNH). This situation also has implications for global markets, particularly for other Asian currencies and commodities. A weaker yuan may exert downward pressure on the currencies of neighboring export-driven countries due to competition with China. Additionally, commodities priced in US dollars may face headwinds, as a stronger dollar against the yuan lowers purchasing power. Create your live VT Markets account and start trading now.

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