The People’s Bank of China (PBOC) sets a daily midpoint for the yuan (RMB) using a managed floating exchange rate system. This allows the currency to move within a set range, currently at +/- 2% of the midpoint. Each morning, the PBOC calculates the yuan’s midpoint against various currencies, with a primary focus on the US dollar. This calculation takes into account market factors such as supply and demand, economic indicators, and global currency movements. The midpoint serves as a reference for trading that day.

Yuan Trading Band

The yuan can fluctuate within a specific range around the midpoint, which is currently +/- 2%. This means the yuan can appreciate or depreciate by up to 2% from the midpoint in a single trading day. The PBOC may adjust this range based on economic conditions and policy needs. If the yuan approaches the limits of this trading band or experiences significant volatility, the PBOC may step in. They can buy or sell yuan to manage its value and maintain stability. The PBOC is expected to set the USD/CNY reference rate at 7.1559, indicating an official recognition of the yuan’s recent weakness. This suggests that the authorities are open to guiding the currency lower in a controlled way. For traders, this reinforces the strategy of expecting a stronger dollar against the yuan. This potential reference rate allows the spot rate to drop further within its daily trading band. A midpoint of 7.1559 means the yuan could weaken up to 7.2990 before reaching the 2% upper limit of its band. Traders might consider buying USD/CNY call options with strike prices between 7.25 and 7.30 to take advantage of this expected move.

Economic Outlook and Trade Strategy

The economic outlook supports this perspective, as China’s export growth figures for the second quarter of 2025 fell short of expectations. Meanwhile, the U.S. Federal Reserve has kept its interest rates high this year, continuing the policy differences that started in 2022. The interest rate gap, with U.S. rates at 5.25% and China’s benchmark at 3.45%, continues to attract investment towards the dollar. However, we should be careful about how fast the yuan might depreciate. In 2023 and 2024, the central bank often set the daily fix stronger than market predictions to avoid drastic changes. This history indicates that while the yuan is heading down, the decline will be managed and gradual. Given the chance of intervention to slow the depreciation, implied volatility in the options market may not rise significantly. Therefore, while buying options for directional trading seems wise, we should be cautious about overspending. Structured products that benefit from a slow, steady increase in USD/CNY—rather than a sudden surge—could be a better strategy. Create your live VT Markets account and start trading now.

here to set up a live account on VT Markets now