Insights 
VT 
The People’s Bank of China (PBOC) set the USD/CNY reference rate at 7.0968 for the upcoming trading session. This is a shift from the previous rate of 7.0995 and below the Reuters estimate of 7.1186.
The PBOC’s primary functions include ensuring price and exchange rate stability while promoting economic growth. It is backed by the state of the People’s Republic of China (PRC), with significant influence wielded by the Chinese Communist Party.
Monetary Tools of PBOC
The PBOC employs various monetary tools such as the Reverse Repo Rate, Medium-term Lending Facility, Reserve Requirement Ratio, and the Loan Prime Rate. The Loan Prime Rate is significant as it directly affects borrowing costs and savings rates, influencing the Chinese Renminbi’s exchange rate.
China hosts 19 private banks, including notable digital lenders like WeBank and MYbank. These banks started operating in the state-heavy financial sector following reforms in 2014, allowing private capitalised domestic banks.
The People’s Bank of China has signaled its intent to support the yuan by setting today’s reference rate significantly stronger than market expectations. This move challenges the prevailing bearish sentiment that has been building over the past few months. Traders should view this as a direct policy signal that authorities are uncomfortable with the recent pace of yuan depreciation.
Chinese Economic Policy Signals
We have seen this pattern before, particularly during the economic headwinds of 2023, where strong fixings were used to deter one-sided bets against the currency. With China’s Q3 GDP growth recently reported as steadying at 4.8% year-over-year, policymakers likely feel they have the capacity to enforce currency stability. This action is a clear warning against aggressively shorting the yuan in the spot or futures markets.
Given the divergence with the US Federal Reserve’s sustained ‘higher for longer’ interest rate policy, this creates a policy clash that will likely increase volatility. Derivative traders should anticipate a period of choppy, range-bound trading rather than a clear directional trend. Implied volatility on USD/CNY options will likely rise, making strategies that profit from this, such as straddles, more appealing.
In the coming weeks, buying call options on the USD/CNY pair becomes a riskier proposition, as the PBOC has shown its hand. Traders holding long positions might consider purchasing downside protection, such as puts, to hedge against a policy-driven retracement towards the 7.05 level. The cost of these options has likely increased, but they offer defined risk in an uncertain environment.
