The People’s Bank of China (PBOC) sets the daily center point for the yuan, mainly against the US dollar. This system allows the yuan to fluctuate within a range of +/- 2% around a central reference rate. Every morning, the PBOC determines this midpoint by looking at market supply, demand, economic indicators, and changes in the international currency market. This midpoint directs trading for the day.

Yuan Trading Band

The trading band lets the yuan move by up to 2% from the midpoint, based on economic needs and policy goals. If the yuan approaches these limits or becomes too volatile, the PBOC may step in to buy or sell yuan to maintain stability. This managed approach allows the central bank to steer the currency’s value while permitting controlled adjustments according to economic conditions. The PBOC’s expected reference rate of 7.1157 indicates a continued aim for a stable yuan. This rate is slightly stronger than the lows seen in late 2024, showing that authorities focus on supporting the economy. China’s Purchasing Managers’ Index (PMI) has stayed just above 50 for the past two quarters, suggesting that the recovery in manufacturing is weak and relies on a competitive currency for support.

Impact on Derivative Traders

For derivative traders, the key point is that the central bank’s strong control will likely keep implied volatility low in the upcoming weeks. Looking back, one-month USD/CNY implied volatility has remained in a narrow range of 3.8% to 4.7% for most of 2025, much lower than the significant spikes seen in previous years. This situation makes strategies like selling short-dated options to collect premiums appealing, as large price swings are discouraged by policymakers. We expect the spot USD/CNY rate to continue testing the lower end of its +/- 2% trading band, especially with the ongoing weakness in China’s property sector. However, the central bank’s consistent actions have set a solid policy ceiling around the 7.37 level this year. This creates a clear range, suggesting that buying USD/CNY when it dips toward the midpoint and selling near the top of the band could be a good strategy for the near future. Create your live VT Markets account and start trading now.

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