The People’s Bank of China (PBOC) determines the daily midpoint for the yuan, which is crucial for currency trading. They use a managed floating exchange rate system. This allows the yuan to vary by 2% around the midpoint.

Setting The Midpoint

Every morning, the PBOC calculates the yuan’s midpoint against different currencies, especially the US dollar. They consider factors like supply and demand, economic indicators, and global market changes. This midpoint guides trading for the day. The yuan can move within a 2% range around this midpoint. The PBOC might change this range depending on economic conditions and policy goals. If the yuan gets close to this limit or shows too much volatility, the PBOC may take action. The central bank may buy or sell yuan to control its value. This helps make sure the currency’s value adjusts smoothly, keeping the market stable. Currently, the PBOC is expected to set the USD/CNY midpoint at about 7.1021. We are watching closely for any changes from this target. If they set a stronger fix (a lower number), it would show increased efforts to support the yuan. On the other hand, a weaker fix would indicate they might accept a gradual depreciation. This comes in light of China’s exports falling by 3.2% year-on-year in August 2025, putting pressure on the currency. The bank is using the daily fix to fight this weakness and prevent quick outflows. Their strong management has kept the exchange rate steady for several weeks.

Impact on Derivative Traders

For derivative traders, this strong intervention has reduced volatility significantly. The one-month implied volatility for offshore yuan (USD/CNH) is near a six-month low of about 4.5%. This makes buying options cheaper compared to earlier in the year. Given the low prices, there’s an opportunity to purchase long-dated strangles or straddles. This strategy would be profitable if there’s a big price move in either direction, especially if economic data forces the PBOC to change its policy quickly. Current stability won’t last forever, creating a perfect setup for volatility trading. We remember the sharp fall in value late in 2023 when the exchange rate rose above 7.30. The central bank is clearly aiming to avoid a repeat of that situation. This suggests that while the overall trend may be for a weaker yuan, the PBOC will defend key levels. Therefore, selling call options with strike prices well above 7.25 could be a good income-generating strategy for those betting on the central bank’s effectiveness. The main risk remains a sudden policy change from the PBOC, which could occur without warning. We need to stay aware of the daily fix and any comments from officials. The current calm offers opportunities, but this calm relies entirely on the central bank’s actions. Create your live VT Markets account and start trading now.

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