The People’s Bank of China (PBOC) sets a daily midpoint for the yuan based on a group of currencies, mostly the US dollar. This midpoint serves as a reference point, and the yuan can vary within a certain range. Right now, the PBOC allows the yuan to move within a band of +/- 2% from this midpoint. This means the currency can strengthen or weaken by up to 2% in a single trading day. The PBOC can change this band depending on the economy and its policy objectives.

Daily Midpoint Determination

Each day, the PBOC determines the midpoint by looking at market supply and demand, along with changes in the global currency market. If the yuan approaches the limits of its trading range or experiences significant swings, the PBOC might step in by buying or selling yuan. This action aims to stabilize the currency’s value and ensure a smooth transition. The PBOC shows it wants to keep the yuan stable, setting a reference rate of 7.1901, stronger than many models predict. This suggests an official aim to avoid rapid drops in the currency, especially under economic strain. Traders should see this as part of a policy to manage the yuan’s gradual decline, not stop it. Despite recent sluggish economic data—like a disappointing 4.8% GDP growth in Q2 2025—and a sharp year-over-year drop in July 2025 exports, the PBOC’s strong stance is notable. These factors typically indicate a weaker currency, making the PBOC’s approach even more significant. This strategy resembles what we observed in 2023 and 2024, where the central bank consistently set the daily rate stronger than market predictions to ease depreciation pressures. Historical trends show that while the overall direction may be downward, authorities will actively resist sudden, chaotic drops. Betting on a sudden currency crash is thus quite risky.

Trading Strategies Amid Yuan Stability

For traders, this controlled environment suggests that implied volatility may stay low in the upcoming weeks. Selling short-dated options, like strangles on the offshore yuan (USD/CNH), may be a good strategy to take advantage of the narrow trading range allowed by the +/- 2% band. The current one-month implied volatility is near historical lows, indicating expectations of stability. However, the fundamentals and the significant interest rate gap with the US, where rates remain high, still point to a weaker yuan in the long run. This means that while short-term volatility bets might not succeed, longer-term positions like buying USD/CNY call options that expire in several months could benefit from the slow, managed depreciation. This allows traders to follow the underlying trend without opposing the central bank’s daily actions. Create your live VT Markets account and start trading now.

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