The People’s Bank of China (PBOC) sets the daily midpoint for the yuan, also known as the renminbi (RMB), against several currencies, especially the US dollar. This reference rate is announced around 0115 GMT each day. The PBOC manages a floating exchange rate system, allowing the yuan to move within a range or “band” of +/- 2% from this midpoint. The PBOC considers factors like market supply and demand, economic indicators, and international currency movements. The bank may adjust the trading band based on economic conditions and its goals. If the yuan approaches the limits of this band or becomes too volatile, the PBOC may step in and buy or sell yuan to stabilize the market.

Controlled Adjustment of the Yuan’s Value

The trading band allows for a controlled adjustment of the yuan’s value, limiting its daily change to a maximum of 2% from the midpoint. This keeps the foreign exchange market stable while still enabling necessary changes based on current economic conditions. Currently, the expected USD/CNY reference rate is around 7.2062, indicating that the PBOC is maintaining its policy of managed depreciation. This suggests that while authorities are okay with a weaker yuan, they won’t let it drop uncontrollably. Traders can expect the PBOC to intervene to smooth out any sharp fluctuations. From 2023 to 2024, we observed this trend during a persistent property sector crisis and low consumer demand. In that time, the PBOC consistently set the daily fix stronger than market expectations to guard against quick capital flight. This history shows the PBOC values stability, making it unlikely for the +/- 2% trading band to be tested too harshly.

Emphasis on Stability

The focus on stability has kept actual currency volatility low, despite rising economic pressures. Implied volatility on USD/CNY options has been steadily decreasing over the past year. This environment favors strategies that benefit from low volatility, such as selling out-of-the-money puts and calls. A weaker yuan has also been essential for supporting China’s manufacturing sector. For example, in May 2024, China’s exports rose by 7.6% year-over-year, surpassing expectations. Given this success with a managed float, policymakers are likely to continue this approach in the coming weeks. Considering this, derivative traders should prepare for a slow, controlled increase in the USD/CNY pair rather than a sudden jump. Strategies like buying call spreads on USD/CNY could be effective as they benefit from limited upward movements while capping potential losses. Aggressive bets on a sudden depreciation are unlikely to succeed due to the high chance of central bank intervention. Create your live VT Markets account and start trading now.

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