The People’s Bank of China (PBOC) is the central bank that sets the daily midpoint for the yuan, also known as the renminbi (RMB). The PBOC uses a managed floating exchange rate system. In this system, the yuan’s value can fluctuate within a specific range, or “band,” around a central reference rate or “midpoint.” Currently, this band is set at +/- 2%. The yuan’s last closing rate was 7.1415. Recently, the PBOC injected 212.6 billion yuan into the financial system using 7-day reverse repos at a 1.40% interest rate. This move resulted in a net drainage of 203.5 billion yuan. The net liquidity drain of 203.5 billion yuan signals a tightening of policy. This is a deliberate effort to raise the cost of shorting the yuan and discourage speculative bets against it. The PBOC aims to maintain stability around the current levels. This intervention comes as the US Dollar Index remains strong, trading around 106.5 due to the Federal Reserve’s continued hawkish stance. China’s August 2025 trade data showed a surplus of $75 billion, which was solid but not strong enough to lift the yuan against the dollar’s broad strength. Thus, the PBOC is stepping in to actively manage the exchange rate. For derivative traders, the PBOC’s guidance should reduce expected volatility in the coming weeks. The central bank is signaling a ceiling for the USD/CNY pair, making a sudden, sharp drop in the yuan less likely. Implied volatility for one-month USD/CNH options has already decreased to 4.8% from 5.5% last week, reflecting this sentiment. Given this situation, strategies that profit from stable price movements look favorable. Selling out-of-the-money call options on USD/CNY to collect premiums is appealing, as the PBOC’s actions will likely limit the upside. This strategy assumes the exchange rate will not rise significantly in the near future. We have seen a similar approach before in the second half of 2023 when the PBOC defended the 7.30 mark through liquidity management and strong daily fixings. That period also experienced low volatility and frustration for those betting on yuan weakness. The current actions suggest a similar defensive strategy. Therefore, we’ll be keeping a close eye on the daily midpoint fixing from the PBOC each morning. If they consistently set the reference rate stronger than expected, it will confirm their commitment. The key is to trade with the understanding that the central bank is actively managing the currency within its official +/- 2% band.

here to set up a live account on VT Markets now