The People’s Bank of China (PBOC) is expected to set the USD/CNY reference rate at 7.1742, according to estimates from Reuters. This decision will be made around 0115 GMT, as the PBOC determines the daily midpoint for the yuan. The PBOC uses a managed floating exchange rate system, allowing the yuan to move within +/- 2% of the reference rate. This daily midpoint helps regulate the yuan’s value against other currencies, especially the US dollar.

Factors Influencing the Midpoint

This midpoint is influenced by market supply and demand, economic indicators, and changes in international currency markets. The allowed trading band permits the yuan to rise or fall by up to 2% from the midpoint in a single trading day. If the yuan nears these limits or shows high volatility, the PBOC might step in to stabilize the currency. This intervention can involve buying or selling the yuan to keep its value steady. The expected fix of 7.1742 indicates the central bank’s continued effort to prevent rapid yuan depreciation. Throughout mid-2025, the central bank has consistently set a stronger reference rate than market forecasts. For traders, this suggests that betting on a sudden jump in USD/CNY is a risky move, given state policy. This management comes as China’s economy shows signs of slowing, with GDP growth for Q2 2025 at 4.8%, slightly below expectations. Additionally, July’s export data revealed a 1.5% year-over-year decline, indicating that weaker global demand is impacting the domestic economy. These issues put downward pressure on the yuan, which the PBOC is trying to balance out.

Derivative Strategies for Traders

With the central bank actively involved, implied volatility for USD/CNY options may be higher than usual in the coming weeks. The PBOC’s control, similar to what we saw in 2023-2024, creates a ceiling for this currency pair. This makes selling volatility, like using covered calls on USD/CNY, an appealing strategy. Traders should anticipate that the currency pair will stay within a clear range defined by the daily reference rate. The +/- 2% trading band is more of a theoretical limit than an actual target since intervention happens before reaching those extremes. Thus, traders may consider range-bound strategies, such as iron condors, to take advantage of this stability. Create your live VT Markets account and start trading now.

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