The People’s Bank of China (PBOC) sets a daily midpoint for the yuan against various currencies, mainly the US dollar, as part of a managed floating exchange rate system. This system allows the yuan to move within a narrow range of +/- 2% around this central reference rate, or “midpoint.” Every morning, the PBOC establishes this midpoint by looking at market supply and demand, economic indicators, and changes in the international currency market. This midpoint serves as a reference for trading that day. The trading band of +/- 2% allows the yuan’s value to rise or fall by up to 2% from the midpoint during the trading day.

Foreign Exchange Market Intervention

If the yuan’s value hits the band limits or experiences too much volatility, the PBOC intervenes in the foreign exchange market. This intervention means buying or selling the yuan to stabilize its value. This ensures controlled adjustments and supports economic stability, aligning with China’s monetary goals. The expected reference rate of 7.1159 indicates that the central bank wants to keep the yuan stable. A strong “fix” suggests a careful effort to stop the currency from weakening too quickly, which could reduce expectations of significant price swings soon. For derivative traders, this hints at a period of managed low volatility. Looking at the larger economic picture, the US dollar has remained strong during 2025 because the Federal Reserve has kept interest rates high. Additionally, recent data showed that China’s exports dropped by 5% year-over-year in August. These factors naturally push the USD/CNY rate higher, so the central bank is actively working against market pressure with this fixing. This management has also lowered the cost of options. One-month implied volatility for USD/CNY has dropped to around 3.5%, down from over 5% earlier this year. This conditions makes strategies that benefit from low volatility, like selling straddles, more attractive for traders betting that the exchange rate will stay close to its band.

Historical Precedent and Risk Assessment

We have seen the central bank use this strategy before. In late 2023, the PBOC set strong reference rates to slow the yuan’s depreciation towards the 7.35 mark. This historical precedent gives us confidence that they are genuinely trying to stabilize the currency now. However, the key risk is how long the policy can hold against fundamental pressures. Traders should closely monitor the difference between the daily midpoint and the spot price, which also trades within the +/- 2% band. If the spot rate consistently approaches the lower end of its band at around 7.2582, it would signal that the central bank’s control might be weakening. For those involved in commerce, the current low implied volatility offers a good chance for cost-effective hedging. Businesses looking to buy US dollars can use call options to guard against a sudden drop in the yuan’s value. The premiums on these options are currently cheaper than they would be in a more volatile market. Create your live VT Markets account and start trading now.

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