The People’s Bank of China (PBOC) is expected to set the USD/CNY reference rate at 7.1784. This rate is updated daily within a managed floating exchange system that allows for fluctuations of +/- 2%. Each morning, the PBOC calculates a midpoint based on market demand and global economic factors. This midpoint is the basis for trading throughout the day.

Yuan Fluctuation Allowance

The yuan can move within a 2% range of the midpoint. Daily changes in value can only go up or down by this maximum limit. If the yuan gets close to the boundaries of this range or shows high volatility, the PBOC might intervene. They can buy or sell yuan to keep its value stable. We believe that, based on the PBOC’s actions, the main strategy will be to expect a slow and managed depreciation of the yuan. The central bank has often set the daily midpoint much stronger than market predictions—recently by as much as 1,500 pips. This suggests they want to avoid a rapid sell-off. While there’s still downward pressure on the yuan, the central bank will use its reference rate to control how quickly it declines.

China’s Economic Data And Policy Interventions

The need for this intervention is based on China’s current economic data, which reveals weaknesses in the currency. The official manufacturing PMI for May fell back into contraction at 49.5, and the property sector shows few signs of recovery. The PBOC is acting against market trends to ensure stability. We expect this approach to continue as long as these economic challenges exist. This tightly controlled environment has lowered implied volatility in the USD/CNY pair, making options that benefit from low volatility quite appealing. The daily setting process effectively establishes a ceiling for the US dollar and a floor for the yuan, reducing the chances of sudden, large price swings. We see chances in derivatives that profit from the currency staying within a predictable, slow-moving range. Traders should watch for the spot price hitting the weak end of the 2% trading band around the daily midpoint. If this happens, it could mean that market pressures are testing the current policy, potentially leading to more direct intervention. Historically, changes in the fixing mechanism, such as the unexpected devaluation in 2015, have caused sudden spikes in volatility, making cheaper long-volatility positions a smart hedge against rapid policy changes. Create your live VT Markets account and start trading now.

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