**Every Morning** The People’s Bank of China (PBOC) will announce the USD/CNY reference rate, expected to be 7.1174, around 0115 GMT. China’s central bank has a managed floating exchange rate system. This system allows the yuan, also called the renminbi (RMB), to move within a set range based on a daily reference rate. Each morning, the PBOC sets a midpoint for the yuan against several currencies, mainly the US dollar. This rate considers market supply and demand, economic indicators, and movements in the global currency market. The yuan can vary by +/- 2% from this midpoint. It may rise or fall up to 2% in one trading day. The PBOC can change this trading band depending on economic conditions and policies. If the yuan approaches the limits of the trading band or sees high volatility, the PBOC may step in. They might buy or sell yuan to stabilize its value, which helps control currency fluctuations. **Expected USD/CNY Reference Rate** The expected USD/CNY rate of 7.1174 signals the PBOC’s goal of keeping the yuan stable against a strong US dollar. This fixing is generally stronger than market expectations and indicates the bank’s ongoing effort to prevent rapid depreciation of the yuan. Traders should view this as the central bank’s commitment to defending the yuan, creating a soft floor for its value. This defensive approach comes as recent economic data presents mixed signals. China’s industrial production in August 2025 increased by 4.2%, but retail sales only grew by 3.5%. Meanwhile, the US August CPI showed strong growth at 3.4%, making it less likely for the Federal Reserve to cut rates. This situation naturally increases pressure on the USD/CNY pair. The PBOC’s strong fixing is the main factor countering this dollar strength. With the PBOC’s consistent management, we expect the implied volatility on USD/CNY options to stay low in the coming weeks. The +/- 2% trading band helps limit price swings, making low-volatility strategies, like selling straddles, appealing. We observed this trend throughout 2025, where the bank focused on stability rather than allowing significant weakness. We expect the spot rate to stay within a narrow channel, likely between 7.10 and 7.25 over the next month. This makes options strategies like iron condors, which bet on the price remaining in a specific range, a smart choice. Any major moves towards the upper end of this range could provide an opportunity to bet on a return to the PBOC’s midpoint. This controlled environment stands in sharp contrast to the volatility seen in late 2023 and 2024, when the USD/CNY rate often went above 7.30. The current policy suggests that authorities prioritize preventing capital outflows and ensuring financial stability over boosting exports. This past experience should make traders more cautious about betting on yuan weakness. Create your live VT Markets account and start trading now.

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