The People’s Bank of China (PBOC) is predicted to set the USD/CNY reference rate at 7.1820. This rate will be revealed around 0115 GMT. The PBOC sets a daily midpoint for the yuan against other currencies, mainly the US dollar. China uses a managed floating exchange rate. This allows the yuan to change within a 2% range around the central reference rate. Each morning, the PBOC determines this midpoint based on market demand, economic data, and fluctuations in international currencies. This midpoint serves as the trading reference for the day.

Yuan Fluctuation and Central Bank Intervention

The yuan can move within +/- 2% of the midpoint. The PBOC may change this range based on economic conditions. If the yuan approaches the limits of this band or becomes too volatile, the PBOC may step in to stabilize its value. This intervention can involve buying or selling the yuan. By setting the USD/CNY reference rate at 7.1820, the central bank provides a stable daily anchor for those engaged in yuan trading. This midpoint is influenced by global exchange factors, local economic conditions, and market sentiment. It serves as a guideline rather than a strict rate but is seldom seriously challenged. Currently, the currency is allowed to move within a 2% band above and below this midpoint throughout the day. Previous interventions show that officials are likely to tolerate gradual changes but will act to prevent sudden shifts. In the upcoming weeks, various factors, especially foreign monetary developments like those in the US, could lead to stronger dollar demand, which would put downward pressure on the yuan. Authorities are aware of this and will likely try to prevent significant changes, even in reaction to external shocks. When the central bank sets a specific rate like 7.1820, it signals its intention to maintain strong control. It’s like securing a tent’s outer cords — allowing some movement but preventing collapse. Therefore, when considering strategies involving yuan-denominated pairs, it isn’t wise to expect large swings unless external factors might truly disrupt that rate. Traders should focus on range-bound strategies, avoiding extreme bets based on broader economic shifts, unless those shifts could prompt a reevaluation of the midpoint.

Implications for Traders and Intervention Patterns

Traders should also consider the expected patterns of intervention. Historically, the central bank is willing to take action to stabilize the currency when needed. This intervention isn’t always aggressive. Often, liquidity tools or clear signals through the official fix indicate discomfort. However, with current pressures on exports and sensitive capital flows, an undervalued yuan poses risks. Policymakers likely want to avoid a situation where a weak currency leads to increased outflows, driving further weakness. Keeping the midpoint close to current spot levels indicates an effort to strike a balance. Policymakers aim to maintain stability without completely resisting market forces. Therefore, it’s wise to assume that significant depreciation below the current band won’t be allowed. This makes betting on additional weakness risky unless significant news emerges to change official policy. On the other hand, substantial appreciation could clash with trade competitiveness, which may also face subtle resistance. We are closely monitoring any shifts in the daily fixing pattern or unexpected deviations, as these might precede tighter policy changes. For trades involving yuan crosses, careful attention to daily fixes and forward curves is necessary. A tightening of daily bands or larger gaps between fixes and spot prices could indicate future adjustments. Until then, the range appears well-defined. Lastly, it’s important to note that derivative pricing aligns with this careful approach. Current implied volatilities are stable, and there is a slight bias toward hedging against yuan depreciation, although nothing extreme. Strategies should consider selling premium during quieter periods while also incorporating options to guard against sudden mispricings from policy surprises. Holding a long-term directional view without factoring in the daily anchoring mechanism could lead to misleading results. Create your live VT Markets account and start trading now.

here to set up a live account on VT Markets now