The People’s Bank of China (PBOC) plans to set the USD/CNY reference rate at 7.1359, according to Reuters. This bank sets the daily midpoint for the yuan, known as renminbi (RMB), against a group of currencies, primarily the US dollar. The PBOC uses a managed floating exchange rate system. This allows the yuan to move within a +/- 2% range from the central reference rate. Each morning, the midpoint is determined based on market supply and demand, economic data, and global currency trends.

Midpoint Guidance

The midpoint serves as a guide for trading each day. The trading band permits the yuan to adjust within a set range around this midpoint, allowing for a maximum appreciation or depreciation of 2% during any trading day. If the yuan approaches the trading band limits or experiences high volatility, the PBOC may intervene by buying or selling the yuan. This aims to stabilize its value, ensuring that changes in the currency’s market position remain controlled. With the PBOC expected to set the USD/CNY midpoint at 7.1359, there’s a continued focus on stabilizing the yuan. This strong guidance indicates that the central bank will try to prevent rapid depreciation, as seen throughout 2023 and 2024. For derivative traders, this means the currency will likely stay within a narrow range in the near future. However, there is ongoing pressure for a weaker yuan due to the interest rate gap with the US, where 10-year Treasury yields remain around 3.9%. China’s own economic data, like the 4.8% GDP growth for the second quarter of 2025, indicates a slow domestic recovery. This environment makes the PBOC’s daily management of the exchange rate a key focus for traders.

Trading Strategies

Given the PBOC’s active management, implied volatility on USD/CNH options has decreased, with one-month volatility recently hitting a low of 3.5%. In this context, selling options becomes an appealing strategy for generating income. Traders might consider selling short-dated strangles, which allow them to profit as long as the currency pair does not move significantly in either direction. For those expecting a slow and controlled depreciation, using option spreads is a smart approach. Buying simple call options may not be effective due to time decay in a stable market. Instead, bullish call spreads offer a good alternative, capping potential profits while lowering initial costs and risks. Looking back, a similar situation occurred in late 2023 when the spot rate remained close to the weak end of its 2% trading band for months due to strong central bank guidance. This period demonstrated that betting against the PBOC’s control is challenging. Therefore, strategies that align with a gradually moving currency appear to be the best choice for the coming weeks. Create your live VT Markets account and start trading now.

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