The People’s Bank of China (PBOC) sets a daily midpoint for the yuan, which affects its exchange rate. This midpoint is based around the US dollar. It changes according to supply and demand, economic indicators, and shifts in the currency market. The PBOC allows the yuan to move within a range of +/- 2% from this midpoint. This band allows the yuan to appreciate or depreciate during a single trading day. The PBOC can adjust this band to respond to economic changes or policy goals.

Managed Floating Exchange Rate System

If the yuan approaches the limits of its band or becomes unstable, the PBOC may step in by buying or selling the currency. This helps maintain the yuan’s value and manage fluctuations. This managed floating exchange rate system supports controlled currency management. With an expected USD/CNY reference rate of 7.1774, the People’s Bank of China appears to be continuing its managed depreciation strategy. This rate is slightly weaker for the yuan, reflecting market pressures, but it is still much stronger than many market models suggest. This creates a predictable tension that traders can leverage in the weeks ahead. We have seen this pattern before, especially during 2023-2024, looking back from August 2025. During that time, the central bank consistently set the daily fix stronger than market estimates to slow the yuan’s decline against a strong dollar. This history indicates that the PBOC is likely to act as a brake to prevent any sudden moves toward a significantly weaker yuan. Recent economic data supports the market’s wish for a weaker currency to help the economy. China’s export growth for the second quarter of 2025 was just 1.5%, and the latest manufacturing PMI for July 2025 dropped to 49.9, indicating a minor contraction. These numbers give the PBOC a reason for gradual weakening, but its main focus is still on stability.

Trading Strategies and Market Monitoring

For derivative traders, this scenario suggests that the implied volatility in USD/CNY options may be too high. With the central bank managing the exchange rate, large, unexpected changes are less likely. Therefore, strategies like selling volatility, such as short strangles, could be profitable as long as the currency stays within the PBOC’s range. The key will be to figure out the unofficial upper and lower limits of the PBOC’s comfort zone. While the official band is +/- 2%, the actual range is tighter because of interventions. Any move in the spot rate toward 7.25 would likely prompt a stronger response from the PBOC, making it a solid resistance level for trading. Traders should keep an eye on the daily difference between the PBOC’s fix and market expectations. If this gap begins to widen significantly, it signals that underlying pressure is building. This could lead to a more considerable but still controlled shift in the exchange rate, creating an opportunity for those prepared for a managed move. Create your live VT Markets account and start trading now.

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