Insights 
VT 
The People’s Bank of China (PBOC) set the USD/CNY central rate for Friday’s session at 7.0949, slightly lower than the previous rate of 7.0968 and below the 7.1154 Reuters estimate.
The PBOC aims to maintain price and exchange rate stability while promoting economic growth and implementing financial reforms. Owned by the state of the People’s Republic of China, its direction is influenced by the Chinese Communist Party.
Monetary Policy Tools
The PBOC employs various monetary policy tools, such as the Reverse Repo Rate, Medium-term Lending Facility, foreign exchange interventions, and Reserve Requirement Ratio. The Loan Prime Rate is the benchmark interest rate, determining market loan and mortgage rates.
Private banks are permitted in China, including 19 financial institutions like digital lenders WeBank and MYbank. These are backed by major tech companies Tencent and Ant Group. In 2014, private lenders were allowed to operate within the traditionally state-dominated financial sector.
The People’s Bank of China has signaled a clear intent to support the yuan by setting today’s reference rate much stronger than market expectations. This move suggests that authorities are uncomfortable with further currency weakness and are drawing a line in the sand. For derivative traders, this increases the risk of holding short yuan positions, as the central bank is actively working against that direction.
We should see this action in the context of China’s latest economic data, which showed Q3 2025 GDP growth beating forecasts at 4.8%. This stronger economic footing gives the PBOC justification to guide the currency higher and curb capital outflow pressures we observed earlier in the year. This contrasts with the persistent yuan weakness we saw through much of 2024 when economic data was less certain.
Impact on USD CNY Volatility
This policy move will likely suppress implied volatility in the USD/CNY pair over the next few weeks. Therefore, strategies that profit from low volatility, such as selling short-dated strangles or straddles, could be considered. The PBOC’s strong hand makes a sudden, sharp depreciation less likely, capping the potential upside for USD/CNY call options.
Looking back, the PBOC has historically used its powerful policy tools to manage the currency’s path, especially during periods of dollar strength. The Federal Reserve’s decision to hold rates in September 2025 has kept the dollar firm, and this strong fix is a direct response to that pressure. We should anticipate that the central bank will continue to use its daily fix to counteract market forces pushing for a weaker yuan.
Traders should monitor the PBOC’s other policy instruments, like the Medium-term Lending Facility (MLF), for further clues. If the central bank maintains a firm currency stance while also ensuring ample liquidity in the banking system, it would signal confidence in domestic stability. Any unexpected changes to key rates would immediately alter this outlook.
