Insights 
VT 
The People’s Bank of China (PBOC) has set the central rate for the USD/CNY at 7.1366, compared to the estimated 7.1667. This rate-setting is part of China’s managed floating exchange rate system, where the yuan can fluctuate within a +/- 2% band around the central rate.
The previous close for the yuan stood at 7.1800. The PBOC has injected 160.7 billion yuan into the economy through 7-day reverse repos at a rate of 1.40%. However, with 449.2 billion yuan maturing today, there is a net drainage of 288.5 billion yuan.
Looking Ahead
The economic calendar in Asia will feature China’s services PMI on Tuesday, August 5, 2025.
The People’s Bank of China has sent a clear message today, August 5, 2025, by setting the yuan’s reference rate significantly stronger than the market anticipated. This aggressive move signals a determined effort to stop the currency’s recent depreciation against the dollar. This is not just a minor adjustment; it is a direct pushback against prevailing market sentiment.
This action comes despite a backdrop of unconvincing economic performance, which we saw with Q2 2025 GDP growth coming in at a modest 4.5%, missing forecasts. Just last week, China’s July export data also showed a year-over-year decline of 3%, highlighting weak external demand. These fundamentals normally justify a weaker yuan, creating a direct conflict between policy and economic reality.
Policy Divergence
Adding to the pressure is the continued policy divergence with the United States, where the Federal Reserve has maintained a hawkish stance through mid-2025. With US interest rates holding firm above 5%, the yield differential continues to favor the dollar. This underlying factor has been the main driver pushing the USD/CNY pair higher for most of the year.
We have seen this playbook before, particularly during the summer of 2023 when similar strong fixings were used to slow the yuan’s slide. While that strategy managed to curb the pace of depreciation, it did not fully reverse the trend until underlying economic data improved. This history suggests the PBOC’s current efforts may only be able to cap the upside for now.
For derivative traders, this conflict between policy and fundamentals means implied volatility in USD/CNY options is likely to rise in the coming weeks. The central bank is drawing a line in the sand, increasing the risk of sharp, sudden movements in the exchange rate. This makes strategies like buying straddles, which profit from a large price move in either direction, more appealing.
Given the PBOC’s firm stance, outright bets on continued yuan weakness have become more hazardous. A more cautious approach would be to sell out-of-the-money call options on USD/CNY. This strategy allows traders to collect premium while betting that the central bank’s actions will successfully place a ceiling on the pair, preventing it from rising much further in the short term.
All eyes will now be on the upcoming Caixin Services PMI data for further direction. A strong reading would validate the PBOC’s move and could trigger a sharp rally in the yuan. Conversely, a weak number would intensify the pressure on the currency and test the central bank’s resolve.
