The People’s Bank of China (PBOC) determines the daily midpoint for the yuan, or renminbi. This is part of a managed floating exchange rate system, allowing the yuan’s value to shift within a range of +/- 2% around this central reference rate. Every morning, the PBOC sets this midpoint using a basket of currencies, mainly considering the US dollar. The bank looks at market supply and demand, economic data, and changes in the international currency market. This midpoint acts as the starting point for trading that day. The PBOC allows the yuan to vary within a +/- 2% range around the midpoint. This range can change depending on economic conditions and policy goals. If the yuan gets close to the edge of this trading range or experiences too much volatility, the PBOC may intervene. The bank can either buy or sell the currency in the foreign exchange market to stabilize its value. These actions aim to manage and gradually adjust the currency’s value over time. In summary, the Chinese central bank carefully manages the daily movements of the yuan. It doesn’t let it float freely, nor does it fix its value. Instead, there’s a new midpoint set each morning that guides the day’s price range, influenced by various global currency changes. Although the currency basket aims to reflect wider market trends, it heavily favors the dollar. This means that the PBOC’s strategy is still very much affected by US economic events, like changes in Federal Reserve policy or US Treasury yields. Because of this dependency, fluctuations in the dollar can introduce volatility into the otherwise stable decisions from Beijing. Recently, these mechanisms have gained importance as liquidity pressures have increased both onshore and offshore. In offshore yuan markets, tightening signals that authorities are subtly discouraging speculative selling without being obvious. Meanwhile, the midpoint fixings have been stronger than expected, indicating a strategy to prevent the yuan from dropping too sharply, even when fundamentals suggest otherwise. As trading progresses, it’s crucial to monitor the daily midpoint level and how it compares to consensus models. Regularly overestimating or underestimating can open arbitrage opportunities, which can be risky if positions aren’t adjusted quickly. If you notice the fixing managed in one direction for several days, it often hints at upcoming administrative actions—whether through liquidity tools or direct market involvement by state banks. With external pressures from the dollar and global liquidity, the gap between onshore and offshore yuan can widen unexpectedly, especially during volatile overnight sessions. This gap serves as a subtle signal when intervention isn’t clear. For instance, if the offshore yuan weakens while the central bank sets a stronger-than-expected midpoint, it’s typically a message rather than mere oversight. Interest rate differences are still important, but factors like earnings season and trade data also influence the models the PBOC uses. A larger-than-expected trade surplus tends to support stronger midpoint settings. However, if the offshore market ignores that and continues to trade weak, we may see widening forward curves and renewed tensions. From a trading perspective, being patient is often wise, but exposure to currency-sensitive derivatives should consider underlying policy motivations that may not appear on the economic calendar. We’ve observed increased intraday volatility when foreign policy cycles diverge from local guidance. For example, sharp changes in US Treasury yields can lead to quick adjustments in CNH forwards, even if Beijing’s official stance remains steady. Going forward, it’s vital to analyze onshore volume data alongside daily fixings. Previously, one could rely heavily on either, but now, decisions are becoming more aligned and less predictable in advance. Those using volatility strategies in the options market, especially delta-neutral ones, may see lower realized volatility unless there’s a specific trigger. Be ready for exaggerated reactions on low volume days, as state-owned banks often create sudden changes in bid-ask spreads in offshore markets. Keeping an eye on these shifts can provide insight into future bandwidth tightening. We’re also closely monitoring overnight repo rates in Hong Kong. If they rise while the onshore yuan remains stable, it usually indicates limited carry opportunities. In this environment, rolling short-dated structures may not offer the flexibility they did a few weeks ago. So, in the short term, what matters most is not where the yuan is currently trading, but where gaps might appear between policy signals and market reactions. Traders who can understand this gap are more likely to avoid getting caught off guard.

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