The People’s Bank of China (PBOC) sets the daily midpoint for the yuan (renminbi), using a mix of currencies, primarily focusing on the US dollar. The yuan’s value can vary within a specific range, known as a “band,” around this midpoint. The PBOC allows the yuan to fluctuate +/- 2% from this midpoint during the trading day. This means the yuan can gain or lose up to 2% in value. The midpoint is influenced by economic indicators and market conditions. If the yuan approaches the limits of its trading band or experiences too much volatility, the PBOC may intervene. This intervention involves buying or selling yuan to preserve stability. Such actions help adjust the yuan’s value gradually and in line with economic conditions and policy goals. Currently, the expected USD/CNY rate is around 7.1405. This suggests that the central bank is allowing the yuan to depreciate in a controlled manner. This is a necessary move due to ongoing domestic economic issues and the US dollar’s strength. The managed system ensures that any currency changes happen slowly and within the set trading band. This view is supported by economic data from August 2025. China’s manufacturing PMI was slightly below the expansion mark at 49.7, and the property market is still weak. Meanwhile, the US Federal Reserve plans to keep interest rates steady to manage persistent inflation, creating a policy gap that supports a stronger dollar. This widening gap puts upward pressure on the USD/CNY exchange rate. With the PBOC’s strong influence, we expect that the implied volatility on USD/CNY options will stay low. In this scenario, buying options like USD calls could be a smart move to prepare for gradual yuan weakness. The low cost of these options presents a good risk-to-reward ratio for aiming towards the 7.20 level. A similar trend was observed during the economic slowdown in 2023 when the central bank allowed the yuan to fall past the 7.30 mark to assist its export sector. This historical trend suggests that traders should see the current policy as a sign that officials prioritize economic stability over the yuan’s strength. Thus, expecting a higher USD/CNY rate is the primary strategy in the upcoming weeks. However, traders should keep an eye out for intervention signs if the yuan’s decline becomes too rapid. The +/- 2% band is a strict daily limit, and we have seen state-owned banks sell dollars to prevent the currency from dropping too quickly. Any such action would indicate a temporary pause in the yuan’s decline and serve as a signal to safeguard profits on long USD positions.

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