The People’s Bank of China (PBOC) sets a daily midpoint for the yuan against other currencies, especially the US dollar. This midpoint helps the yuan trade within a “band” that allows for a 2% change. Each day, the midpoint reflects market demand and global currency trends. The PBOC uses a managed floating exchange rate, letting the yuan move within a +/- 2% trading band around the midpoint. This approach allows the yuan to adjust its value during the day while keeping it stable unless significant economic changes occur.

PBOC’s Intervention in the Forex Market

When the yuan approaches the limits of this band or if market activity is unstable, the PBOC may step in. By buying or selling the yuan, the central bank helps keep its value steady. This intervention allows for a smoother adjustment of the yuan’s value in the foreign exchange market. The PBOC is expected to set the USD/CNY rate at 7.1709, signaling a commitment to stabilization. This level suggests that authorities are carefully managing the currency to prevent it from dropping sharply, as it did at times in 2023. For traders, this shows that the PBOC aims to guard against significant depreciation. This policy seems rational based on recent economic data. Earlier this week, reports indicated that China’s exports fell 1.5% in July 2025, highlighting weak external demand. By managing the currency closely, the PBOC seeks to prevent this weakness from leading to chaotic capital flight, a pattern of intervention seen throughout 2025. The global environment is also supportive of this strategy. In the United States, core inflation for July 2025 was reported at 2.8%, slightly below expectations. This suggests that the Federal Reserve is likely to cut rates before the end of the year. A more cautious Fed puts less pressure on the US dollar, making it easier for the PBOC to manage the yuan.

Strategies for Traders

In the coming weeks, traders might consider selling volatility in USD/CNY options as a smart strategy. The PBOC’s clear intent to manage the exchange rate within a tight band is likely to limit large, unexpected price movements. Therefore, strategies that benefit from low volatility, like short strangles or straddles, seem appealing. Keep an eye on the daily fixing compared to market estimates. During tough times in 2023 and 2024, the PBOC often set reference rates higher than expected to influence market sentiment. Following this trend could reinforce the view that the 7.15-7.25 range will be strongly defended for the rest of the quarter. Create your live VT Markets account and start trading now.

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