The People’s Bank of China (PBOC) set the USD/CNY reference rate at 7.1056, while the estimated rate was 7.1213. The PBOC uses a managed floating exchange rate system where the yuan can fluctuate within a +/- 2% band around a central reference rate or “midpoint.”
The rate of 7.1029 is the strongest for the yuan since 6 November. The previous closing rate of the yuan was 7.1246 against the dollar.
Yuan Devaluation Prevention
The strong fixing of the yuan signals a clear intent to prevent further depreciation. We see this as the central bank drawing a line in the sand, discouraging one-way bets against the currency. This action suggests that going short USD/CNY is the favored directional play for the near term.
This move comes after China’s Q2 2025 GDP growth came in slightly below expectations at 4.7%, putting pressure on the currency over the summer. However, surprisingly resilient export data for August 2025 has likely given policymakers the confidence to guide the yuan stronger. We believe they are trying to foster stability to attract foreign investment.
For options traders, this aggressive defense of the yuan is likely to suppress volatility. Implied volatility on USD/CNH options has already fallen below 5%, a trend we saw throughout late 2023 and 2024 when similar defensive stances were taken. Selling strangles or straddles on USD/CNH to collect premium could therefore be an attractive strategy.
Investment Strategies
This strong signal makes buying put options on USD/CNY a viable directional strategy to position for further yuan strength. Given the central bank’s control, a more conservative approach would be to use put spreads. This would profit from a gradual grind lower in the currency pair towards the 7.05-7.10 range.
We are also seeing this in the context of recent global data, such as the August 2025 US inflation report which came in at a milder-than-expected 3.1%. This has eased pressure from a relentlessly strong dollar, giving the PBOC a window to act. A stable yuan could revive interest in yuan-funded carry trades if US interest rates appear to have peaked.
This stability should also support currencies linked to China’s economic health, like the Australian dollar. We might see strength in AUD/USD as fears of a disorderly yuan devaluation recede. Derivative positions that are long the Aussie dollar could serve as a good proxy trade on this theme.
