The People’s Bank of China (PBOC) has set the USD/CNY reference rate for today at 7.1322, compared to the forecast of 7.1793. This reference rate determines how much the yuan can fluctuate within a set range of +/- 2% around this midpoint.
The previous closing rate was 7.1831. Additionally, the PBOC has injected 266.5 billion yuan into the market through 7-day reverse repos at an interest rate of 1.40%.
Significant Signal from the PBOC
We are seeing a significant signal from the People’s Bank of China today, August 18, 2025. The yuan reference rate was set much stronger than market estimates, showing a clear intent to slow down the currency’s depreciation. This action, combined with the liquidity injection, suggests policymakers are actively managing stability against market pressure.
This move comes as recent economic data for July showed China’s industrial production remains soft, while the US dollar continues to draw strength from a Federal Reserve hesitant to cut rates. This creates a direct conflict between weak economic fundamentals pushing the yuan down and official policy trying to prop it up. For traders, this means the path of least resistance for USD/CNY is still upward, but the journey will likely be slow and choppy.
Given this backdrop, we should consider that implied volatility in USD/CNY options may be overstated. The central bank’s intervention acts as a cap on sharp upward moves, meaning the currency is less likely to experience the large swings that options are priced for. Selling out-of-the-money call options or implementing call spreads could be an effective strategy to capitalize on this suppressed volatility.
Pattern Observed Through 2023 and 2024
This reminds us of the pattern we observed through late 2023 and 2024, when the PBOC repeatedly defended the 7.30-7.35 range with similarly strong yuan fixes. History suggests that while the bank cannot hold back the trend forever, it can successfully slow the pace of depreciation for weeks or months. Therefore, being aggressively long USD/CNY through spot or futures is risky; a more patient approach using options to bet on a slow grind higher is preferable.
