The People’s Bank of China (PBOC) sets a daily midpoint for the yuan, affecting its exchange rate. This system allows the yuan to fluctuate within a specific range or “band” around this midpoint, currently set at +/- 2%. Each morning, the PBOC calculates a midpoint for the yuan compared to a basket of currencies, especially the US dollar. They take into account market conditions and economic data, which helps guide daily trading.

The Yuan Trading Band

The yuan can move within a +/- 2% range around the midpoint during each trading day. The PBOC can adjust this range if needed. If the yuan approaches the band limits or shows too much volatility, the PBOC may step in. When the PBOC intervenes, it buys or sells yuan to stabilize its value. This intervention helps keep changes gradual, aligning with economic conditions and policy goals. The anticipated USD/CNY reference rate of 7.1225 indicates that the authorities are managing a slow decline of the yuan. This trend has been apparent throughout the summer of 2025, as a strong US dollar, supported by the Federal Reserve’s steady interest rates, has stressed emerging market currencies. This managed rate highlights a preference for stability over a quicker market-driven decline.

Implications For Derivatives And Long Term Outlook

For derivatives, the PBOC’s strict management suggests implied volatility will likely stay low in the short term. In 2024, a similar strategy was evident when the daily fix often exceeded market expectations to discourage speculative selling. Selling short-dated options that benefit from low volatility and time decay could be a smart move in the coming weeks. However, the overall economic data tells a different long-term story. In August 2025, China’s export figures showed a 2.1% year-over-year drop, marking three straight months of negative growth. Traders might want to consider longer-term forward contracts or options to bet on a weaker yuan, as the central bank might eventually need to allow for more depreciation to support the economy. The key indicator to watch is the difference between the daily market estimate and the PBOC’s official fixing. Throughout 2025, this difference has often been over 800 pips, showing a strong bias from the bank. If this spread narrows in the next few weeks, it could indicate that policymakers are becoming more comfortable with a weaker currency. Create your live VT Markets account and start trading now.

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