The People’s Bank of China (PBOC) sets a daily midpoint for the yuan (RMB) as part of its managed floating exchange rate system. This system allows the yuan to fluctuate by +/- 2% around the midpoint. This method helps manage the yuan’s exchange rate against a group of currencies, focusing especially on the US dollar.

Midpoint Determination

Every morning, the PBOC sets this midpoint by looking at market conditions, supply and demand, economic data, and international currency market changes. This midpoint acts as a reference for trading during the day. The yuan can move within the 2% range around this midpoint. If there’s too much volatility or if the yuan’s value approaches the trading band limits, the PBOC might step in. This means buying or selling the currency to stabilize its value. This intervention allows for a more controlled and gradual change in the yuan’s market value, which aligns with China’s economic conditions and policy goals. The expected USD/CNY midpoint of 7.1748 suggests that the yuan may continue to depreciate slowly. This is likely in response to recent economic data indicating a slowdown. The central bank’s guidance implies that the yuan might move downward in the short term. Given the managed nature of the yuan, it may be wise to buy US dollar call options against it. The PBOC’s daily management within the 2% band generally prevents sharp, unexpected currency fluctuations, keeping implied volatility low. In 2023, even when the yuan dropped below 7.30, daily volatility remained low, benefiting those who anticipated the direction without overspending on protection.

Hedging Strategies

This perspective is backed by the clear difference in policy between the cautious US Federal Reserve and the more lenient PBOC. Recent data from July 2025 showed Chinese exports fell by 3.5% year-over-year, and Q2 GDP growth was slightly below expectations at 4.2%. This pressure makes a weaker yuan a needed tool for supporting the domestic economy. For traders managing corporate exposures, it’s crucial to re-evaluate hedging strategies. If the trend of yuan weakness continues, the cost of hedging using forward contracts is likely to rise. Locking in forward rates now might be a smart move for those with upcoming payments in US dollars. Create your live VT Markets account and start trading now.

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