The People’s Bank of China (PBOC) has set the yuan’s daily midpoint at 7.1019 against the US dollar, which is lower than the expected rate of 7.1081. The previous closing rate was 7.1184. China’s central bank uses a managed floating exchange rate system. This allows the yuan to change within a range of +/- 2% around the midpoint rate. Recently, the PBOC injected 230 billion yuan through 7-day reverse repos at an interest rate of 1.40%.

Net Injection

The net injection totals 41.7 billion yuan. The PBOC has shown it wants to slow down the yuan’s decline by setting a stronger reference rate than expected. This move suggests that expecting the yuan to weaken quickly in the near future may be a risky bet. It sends a clear message from the authorities aimed at stabilizing market sentiment. For derivative traders, this action may lower implied volatility for USD/CNY options. The central bank’s involvement hints at a limit on the exchange rate, making it less likely for the pair to rise significantly in the upcoming weeks. This situation makes selling option premiums, particularly on upside calls, a more appealing strategy.

Pressure on the Yuan

This strong reference rate comes at a crucial time, as the onshore yuan has weakened over 4% against the dollar so far this year. This pressure stems from a slow recovery in the property market and a significant interest rate gap with the US, where the Federal Reserve has kept rates steady through the summer. The PBOC’s actions are clearly in response to these economic pressures. Looking back, between mid-2022 and late 2023, the central bank regularly set strong daily fixes to defend the 7.30 level. This historical trend supports today’s actions and suggests a sustained effort to stabilize the currency. Traders should be prepared for similar interventions if the yuan faces renewed pressure. Additionally, the liquidity injection indicates that the PBOC is trying to support the economy while preventing the currency from dropping. This dual strategy means that, although the yuan may find some support, the ongoing weaknesses in the domestic economy will continue to apply pressure. As a result, we can expect a range-bound market rather than a full reversal of the trend. Given these circumstances, we should explore strategies that make the most of a capped upside in the USD/CNY exchange rate over the next month. Selling low-delta call spreads on USD/CNY could effectively benefit from the PBOC’s defensive position. This approach allows us to earn from both time decay and the central bank’s attempts to limit yuan weakness. Create your live VT Markets account and start trading now.

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US job growth is slowing down, with nonfarm payrolls increasing by just 22,000 in August. There were also downward revisions of 21,000 jobs for June and July. The average job growth over the last three months is now 29,000, compared to 168,000 in 2024. This is at the lower end of what the Federal Reserve considers stable. The unemployment rate has risen to 4.3% as more people enter the labor force. A recent revision shows that nonfarm payrolls have been adjusted downwards by 911,000 as of March 2025, indicating that job creation over the past year was likely overestimated. This raises concerns that current job figures may be overstated. Inflation continues to be a worry, with the Consumer Price Index (CPI) rising by 0.4% from the previous month and 2.9% from the same time last year.

Inflation Concerns

The core CPI is at 3.1% year-on-year, with core goods inflation increasing at an annual rate of 3% over the last three months. Retailers and wholesalers have been trying to absorb rising costs, but tariff increases have doubled in August. Service inflation, excluding energy, has gone up by 3.6% year-on-year. The Federal Open Market Committee is expected to discuss economic projections and risks, likely considering a 25 basis point rate cut to address job concerns, despite inflation challenges. The jobs market is sending strong warning signals, highlighted by the disappointing 22,000 payrolls in August. Additionally, the large downward revision of 911,000 jobs for the year ending in March 2025 suggests the economy is weaker than we thought. This puts the Federal Reserve in a difficult position for their upcoming meeting, especially with inflation remaining high. The market is almost fully anticipating a 25 basis point rate cut, as indicated by the CME FedWatch Tool, which shows a 90% chance of this move. However, the Fed’s comments may pose a risk, as officials seem more worried about the core CPI holding at 3.1% than about slowing job growth. This might lead to a “hawkish cut,” surprising those who expect a more dovish approach. The clash between slowing growth and ongoing inflation could result in greater market volatility. The VIX index has risen above 19, indicating increased anxiety among traders ahead of the Fed meeting. Options trading to safeguard against sharp market shifts or to capitalize on them may be a smart approach in the weeks ahead.

Market Sentiment and Strategies

For equity index traders, the risks appear to lean toward the downside. The recent drop in weekly jobless claims to 245,000 highlights the weak labor market. Buying put options on the S&P 500 or Nasdaq 100 could be a solid strategy to protect against a negative reaction to the Fed’s guidance. This situation feels similar to late 2023 when markets misjudged the timing of rate cuts. In the bond market, the yield curve remains inverted—showing the 2-year Treasury yield at 4.5% while the 10-year sits at 4.1%. Historically, this has been a strong sign of an impending recession, usually occurring before downturns like the one in 2008. Traders may consider call options on long-duration Treasury ETFs to prepare for a shift to safer investments if economic conditions worsen. Create your live VT Markets account and start trading now.

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The finance ministers of the US and Japan have reaffirmed their commitment to the G7 agreement on currency policy. They stressed that exchange rates should be based on market forces, with interventions only for disorderly conditions, and that operations should be reported monthly. Japan’s Finance Minister Kato has been discussing foreign exchange matters with US Treasury Secretary Bessent. Kato noted the importance of both countries confirming their key points on foreign exchange policies. The decision to issue a joint statement on this topic followed the US executive order on tariffs affecting Japan. Kato clarified that they did not discuss specific foreign exchange levels.

Joint Statement to Stabilize Currency Volatility

This joint statement sends a clear message to help reduce excessive currency volatility. After the new US tariff order in August, the USD/JPY exchange rate is near the 165 level. This reaffirmation of G7 principles aims to calm concerns. However, the ongoing issues from the tariffs continue to be a key market factor. The main takeaway for traders is the unclear definition of a “disorderly market” that would prompt an intervention. The one-month implied volatility for USD/JPY has risen to 10.5% this month, a notable increase from the 7% average earlier in the year. This indicates that while officials talk about stability, the options market expects a higher chance of sudden, unexpected movements. Looking back to autumn 2022, Japanese authorities intervened when the dollar rose above 150 yen. This intervention showed a willingness to allow gradual weakness but a strong stance against rapid declines in the yen. Therefore, derivatives traders should be cautious about aggressively shorting the yen from current levels, as a sudden policy response is now more likely.

Strategies in the Options Market

With these factors in mind, there are opportunities in the options market to navigate these mixed signals. Selling short-dated options to collect premiums carries risks because a sudden announcement on trade or currency policy could lead to major losses. A wiser approach might be to use options spreads to limit risk or buy longer-dated volatility, preparing for a significant move without predicting its direction. Create your live VT Markets account and start trading now.

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The People’s Bank of China (PBOC) controls the daily midpoint of the yuan, or renminbi (RMB), using a managed floating exchange rate system. This system allows the yuan to vary within a specific range, known as a “band,” around a central reference rate. Right now, this band is set at +/- 2%.

Daily Midpoint Determination

Every morning, the PBOC sets a midpoint rate for the yuan against a mix of currencies, especially the US dollar. This setting is influenced by market supply and demand, economic indicators, and global currency trends. The midpoint serves as the reference point for trading that day. The PBOC allows the yuan to fluctuate within a +/- 2% range around this midpoint. This means it can go up or down by as much as 2% from the midpoint in one trading day. The PBOC can change this range if necessary due to economic factors or policy goals. If the yuan approaches the limits of this trading band or experiences significant instability, the PBOC might step in by buying or selling the yuan, stabilizing its value. With an expected USD/CNY reference rate around 7.1081, it seems the central bank is guiding a slow, controlled weakening of the yuan. This is likely a strategy to support the economy rather than a loss of control. For traders, this means that even if the yuan weakens, the change will probably be gradual and carefully managed. This approach makes sense given the current economic data from September 2025. The interest rate gap is crucial since US government bond yields are considerably higher than those of Chinese sovereign debt, which encourages capital to flow out of the yuan. Together with last month’s weak export figures, this justifies using the exchange rate as a support tool.

Economic Implications and Strategy

Thanks to the PBOC’s active management, we shouldn’t expect major volatility in the coming weeks. The daily midpoint setting and the +/- 2% trading band will likely limit any extreme daily shifts. This makes low-volatility strategies appealing. The key will be watching how strongly the central bank supports the edges of this band if the market challenges its limits. This scenario is similar to the managed depreciation seen in the mid-2010s, where the currency weakened gradually without causing panic. The biggest risk for derivative positions now lies not in a sudden collapse, but in an unexpected policy shift from the PBOC. We will be monitoring any changes in the daily fixing away from market expectations, as this would signal a significant shift in their strategy. Create your live VT Markets account and start trading now.

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Japan and the US have restated their commitment not to manipulate foreign exchange (FX) rates. The finance ministers from both countries have reaffirmed their G7 commitments, stating that exchange rates should be determined by the market. They agreed to intervene in the markets only during chaotic situations and will report FX operations monthly. Their joint statement emphasizes their cooperation in macroeconomic matters and exchange rate discussions. Both nations reiterated that market conditions should dictate exchange rates and warned that excessive fluctuations could harm economic stability.

Commitment to IMF Rules

They confirmed their commitment to IMF rules to avoid manipulating FX rates or the international monetary system for unfair advantages. The G7 pledge was restated, emphasizing that fiscal and monetary policies should aim at domestic goals using domestic tools, rather than focusing on exchange rates. The ministers also agreed that macroprudential or capital flow measures should not aim at manipulating exchange rates. They stated that government investment vehicles, like pension funds, invest abroad for profit and diversification, not to impact exchange rates. FX intervention will only occur to address extreme volatility, with a promise of monthly disclosures. The importance of clear exchange rate policies was emphasized. This joint statement indicates that fundamental economic factors, not government actions, will influence the USD/JPY exchange rate. As this pair tests the 168 level, it suggests a high tolerance for further yen weakness. Therefore, we should pay closer attention to macroeconomic data releases from both countries in the coming weeks. The main factor driving this situation is the significant interest rate difference between the two nations. With the Federal Reserve keeping rates at 4.75% after the August 2025 inflation rate of 3.1%, and the Bank of Japan’s policy rate at just 0.25%, there is a strong reason to hold dollars instead of yen. This large gap continues to fuel the carry trade, pushing the pair upward.

Impact on Derivative Traders

For derivative traders, this statement could mean lower implied volatility for USD/JPY options in the near term. The reduced risk of a sudden intervention removes a major source of market uncertainty, making strategies like selling out-of-the-money puts or calls more appealing. We should recall the situation in late 2022 when Japanese authorities intervened heavily as the pair crossed the 150 mark. This historical example shows that while the threshold for intervention is high, it isn’t unlimited. The current statement defines that threshold as “disorderly markets,” a vague term that still allows for action. This agreement may signal a green light to test higher levels, as the threat now relates more to the *speed* of price changes rather than a specific level. We should watch for quick, large moves of over 2 yen within a single trading day, as this may be considered a “disorderly” market. Such a scenario, rather than a slow climb toward 170, is more likely to trigger official action. The monthly disclosure of any interventions promotes transparency, allowing for clear data on past actions, although it does not predict future ones. Therefore, our focus should be on the upcoming US jobs report and CPI data, as these will directly influence the rate gap and the currency’s direction. Create your live VT Markets account and start trading now.

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Former Goldman Sachs CEO Lloyd Blankfein has warned that the U.S. might face another economic crisis soon. He points to hidden risks in credit markets, such as low spreads and increased leverage in private credit. Historically, major economic crises occur every 4-5 years, and Blankfein believes we could be nearing the next one, with credit markets becoming more vulnerable. Credit spreads, like the ICE BofA HY OAS, are at historically low levels, currently around 2.84%. This suggests that risks are being underpriced. Private credit assets under management have risen by 14.5% compared to last year, with more leverage being taken on by insurers. Blankfein is concerned that some assets may be overvalued.

Optimism in Equities

Despite these issues, Blankfein is optimistic about the stock market. He thinks that cuts in Federal Reserve rates could encourage growth and sees artificial intelligence as a key driver for the future. His investment strategy aligns with Goldman’s view of a new bull market, highlighting opportunities in technology, services, manufacturing, and global diversification. He has expressed full confidence in equities, stating he is “100% in on equities.” There is a growing belief that even though a crisis may be overdue, the Federal Reserve’s two rate cuts earlier this year will help keep stock prices up. We are staying fully invested in equities, especially in technology, due to the ongoing AI revolution. For traders, this means using options to stay exposed to potential gains while protecting against a sharp decline. The main risk lies in credit markets, where leverage is increasing among less-regulated private funds. High-yield bond spreads, measured by the ICE BofA index, tightened to about 2.75% last month, suggesting investors may be overlooking risks for some extra yield. We are buying inexpensive, out-of-the-money put options on high-yield bond ETFs like HYG as a hedge for our portfolio in the coming weeks.

Building Defensive Positions

Market complacency is high, with the VIX falling below 13 just last week, making protective measures relatively cheap right now. We recall the low volatility before the 2008 crisis, which shows how quickly market sentiment can change. This is a good opportunity to build defensive positions, like put spreads on financial sector ETFs, without losing much potential profit. Despite these defensive actions, we remain focused on potential gains in stocks, as AI integration continues to improve productivity and corporate profits. We are adding to our long positions with call options on the Nasdaq 100, allowing us to take part in the technology-led rally with defined risk. This strategy supports our belief that we are still in the early stages of a long-term bull market, a trend we recognized back in late 2024. Create your live VT Markets account and start trading now.

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China is unhappy with Mexico’s new 50% tariffs on Chinese cars. These tariffs, influenced by the U.S., could affect $52 billion in trade.

Negative Impact On Mexico’s Business Environment

The Chinese commerce ministry argues that these tariffs will harm Mexico’s business landscape. They warn that this could discourage companies from investing in Mexico. China is also ready to take measures to defend its interests. As a result of the new tariffs, the Mexican Peso is likely to face pressure. It has already dropped 4% against the dollar in the last two weeks, echoing the uncertainty seen in early 2024. Traders might consider buying puts on the Peso or the EWW ETF to protect against further declines during this trade dispute. The biggest impact will be on Chinese automakers, as their access to the market nearby is now limited. We’ve already seen shares of major Chinese EV companies fall by over 8% on the Hong Kong exchange this week. Buying put options on these specific stocks or a broad Chinese technology ETF could be a smart way to respond to the effects of these tariffs. This situation adds to the overall uncertainty in the market, especially for emerging markets that are caught between the two powers. The Cboe Emerging Markets ETF Volatility Index (VXEEM) has risen 15% this month, indicating growing investor concern. We think buying call options on volatility indexes could be a good strategy to benefit from the expected market fluctuations.

Unexpected Retaliation And Market Protection

We also need to monitor the impact on U.S. companies that depend on Mexican manufacturing. We recall how supply chain issues during the 2018-2020 trade disputes affected profits, and a similar scenario could arise if China retaliates. Protective puts on U.S. auto-sector ETFs might be a wise safeguard against potential disruptions and increased production costs. China’s vague threat of “necessary measures” raises the risk of unexpected retaliation that could hit other sectors. This uncertainty makes it smart to have some protection for the broader market. We are looking into inexpensive, out-of-the-money puts on major indices as a form of insurance against a sudden escalation beyond just the auto industry. Create your live VT Markets account and start trading now.

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Research from Morgan Stanley shows that the British pound is not as strong against large trades as the euro or yen. Despite being the world’s fourth most-traded currency, its price movements are similar to smaller currencies like the Swiss franc and New Zealand dollar. A $1 billion trade can significantly affect the pound’s value, unlike Japanese or European currencies. This indicates that global capital flows have a larger influence on exchange rates than trade does. Analysts from Morgan Stanley found that the pound has lower liquidity, meaning price changes depend on when and where trades occur.

Primary Drivers Of The Pound

According to their research, which used simulated client orders during busy hours, capital flows mainly drive the pound’s value. This information was shared by Bloomberg. The pound appears less capable of managing large trades, making it susceptible to sudden price changes. We may see more significant price shifts compared to other major currencies, like the euro. This suggests that in the coming weeks, it might be wise to consider strategies that take advantage of volatility. As the Bank of England prepares to announce its next interest rate decision in early October, uncertainty is growing. UK inflation data from August 2025 showed a stubborn 3.1%, making it hard to predict the bank’s next steps and attracting speculative capital. This situation can lead to a strong reaction from the pound due to its low liquidity.

Lessons From The Past

Looking back at the market chaos in September 2022, we can see how quickly things can change. The announcement of the “mini-budget” caused a dramatic drop in the pound’s value, revealing how sensitive it is to sudden shifts in investor confidence. This historical instance illustrates the risks and opportunities we face today. Therefore, we are considering buying options contracts to prepare for significant price movements while avoiding unlimited risk. Currently, one-month implied volatility for GBP/USD is around 9.5%. This could be a good deal if unexpected policy changes trigger a major shift. We will also focus on making trades near the London close, as this time seems to result in more significant price impacts. Create your live VT Markets account and start trading now.

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In August, New Zealand’s retail card sales increased by 0.7% compared to the previous month, up from an earlier rise of 0.2%. Year-over-year, sales grew by 0.9%, which is lower than the prior rate of 1.7%.

Currency Movement

The NZD/USD currency pair showed little change, remaining slightly lower despite a previous strong rise. This earlier increase was driven by US CPI data that influenced expectations about a possible rate cut by the Federal Open Market Committee in September. The small monthly rise in retail sales is not expected to change the Reserve Bank of New Zealand’s plans, especially since annual growth is slowing. We believe this mixed data suggests the Reserve Bank will keep its Official Cash Rate steady at 5.50%. The domestic economy doesn’t seem strong enough for any aggressive moves. It’s important to note that the recent rise in NZD/USD was mainly due to weak US inflation figures, which increased speculation about a Federal Reserve rate cut. Market focus is now on the FOMC meeting later this month, rather than New Zealand’s data. Current futures markets indicate an over 80% chance of a 25 basis point cut from the Fed, making this the biggest factor affecting the currency pair.

Trading Strategy

Given the current situation, it’s better to trade on volatility instead of taking a strong position on the NZD itself. Using options like straddles or strangles that expire after the Fed’s announcement could be a smart approach for a big price shift. Implied volatility for these contracts is expected to rise as the event approaches. Looking at past cycles, such as before the Fed’s shift in 2019, the market often gets ahead of itself in predicting easing. The main risk for anyone betting on NZD strength is a surprising hawkish stance from the Federal Reserve. If they indicate a delay or push back against market expectations, the US dollar could jump sharply. Create your live VT Markets account and start trading now.

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New Zealand’s August Manufacturing PMI fell to 49.9 from July’s 52.8, indicating a return to contraction in the manufacturing sector. This reading is below the long-term average of 52.5 since the survey started. In August, two out of five key sub-indices showed growth. New Orders increased to 55.2, the highest level since August 2022. Deliveries of Raw Materials also rose slightly to 50.5. However, Production decreased to 46.6, and both Employment and Finished Stocks fell to 49.1 and 47.1, respectively, indicating contraction.

Manufacturing Sector Slips Back

The manufacturing sector’s slip back into contraction, with a PMI of 49.9, points to a broader economic slowdown. This suggests that the Reserve Bank of New Zealand’s recent rate hikes are starting to impact the economy. Traders may want to consider buying put options on the NZD/USD, expecting the currency to weaken as the market leans towards a more cautious central bank. The report shows mixed signals: while production is weak, new orders have reached the highest point since August 2022, hinting at potential future recovery. This disparity between low current production and strong future orders creates uncertainty, suggesting we are at a “choppy” turning point. Such conditions can lead to volatility-based strategies, potentially including purchasing NZD straddles to benefit from significant price swings in either direction. This weak data could lead traders to increase bets on when the RBNZ might cut rates. Although recent quarterly inflation figures dropped to 3.5%, this weakness in manufacturing could convince the central bank that it has done enough for now. It will be important to monitor interest rate swap markets for hints that traders are expecting rate cuts sooner than the previously anticipated mid-2026 timeline.

Relative Economic Performance

Examining the broader picture, New Zealand’s economy is falling behind some of its neighbors. For example, Australia has shown more resilience due to its diverse export mix. This difference suggests a possible trading opportunity, such as going long on the Australian dollar against the New Zealand dollar (long AUD/NZD) to take advantage of this relative weakness. Create your live VT Markets account and start trading now.

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