Insights 
VT 
The People’s Bank of China (PBOC) set the USD/CNY reference rate at 7.0789 for the latest trading session, a change from the previous day’s rate of 7.0779. The PBOC aims to maintain financial stability and economic growth in China, using various policy tools like the Medium-term Lending Facility and Reserve Requirement Ratio.
The PBOC is owned by the state of the People’s Republic of China, with significant influence from the Chinese Communist Party Committee Secretary. It oversees 19 private banks within China’s largely state-dominated financial sector, including prominent digital lenders like WeBank and MYbank.
Important Tools At The PBOC
Important tools used by the PBOC include the Loan Prime Rate, which affects loan, mortgage, and savings interest rates. Changes in this rate can influence the Chinese Renminbi’s exchange rates, impacting international trade and economic stability.
The People’s Bank of China has set the USD/CNY rate at 7.0789, a touch weaker for the yuan than expected. This subtle move signals that authorities may be comfortable with a gradual depreciation to support the economy. We should therefore anticipate further managed weakness in the currency in the weeks leading into the new year.
This action aligns with recent economic figures we have seen, which point to a mixed recovery. For instance, China’s official manufacturing PMI for October 2025 registered at 49.8, slipping back into contraction territory after two months of expansion. This suggests the PBOC may use the exchange rate as a tool to bolster exports and overall growth.
For traders, this steady, controlled depreciation points towards strategies that benefit from low volatility. We believe buying USD/CNY call options with expiries in the first quarter of 2026 could be an effective way to position for a higher exchange rate. The slow pace of the move should keep option premiums relatively contained for now.
Policy Divergence And Global Implications
The policy divergence with the United States is also a key factor that we must watch closely. While the PBOC is signaling an easing bias, the US Federal Reserve is expected to keep its key interest rate elevated above 4.5% into early 2026 to manage persistent inflation. This significant yield differential between US bonds and Chinese bonds continues to make holding dollars more attractive than the yuan.
Consequently, we should consider the ripple effects on commodity-linked currencies. The Australian dollar, in particular, is sensitive to signs of weakness in its largest trading partner, China. We can express this view by considering put options on the AUD/USD, as a weaker yuan often weighs on the Aussie dollar.
