The People’s Bank of China (PBOC) sets the yuan’s daily midpoint against a basket of currencies, primarily the US dollar. This process involves calculating a central reference rate or “midpoint,” around which the yuan can fluctuate within a pre-set limit.
The PBOC allows the yuan to move within a “band,” currently set at +/- 2% from the midpoint. This setup permits the currency to appreciate or depreciate by up to 2% during a trading day. Adjustments to this band can occur depending on economic conditions and policy goals.
Daily Midpoint Determination
Each morning, the midpoint is determined by the PBOC, considering factors such as market supply and demand and global currency market shifts. If the yuan nears the limits of its trading band or sees extreme volatility, the PBOC may intervene by buying or selling yuan. This intervention aims to stabilise the currency’s value, ensuring a controlled shift.
The People’s Bank of China is signaling its intent to maintain a stable yuan, with the expected reference rate of 7.1901 being stronger than many market models would suggest. This indicates an official desire to prevent rapid currency depreciation in the face of economic pressure. Derivative traders should view this as a continuation of a policy to manage, not halt, the yuan’s gradual slide.
We’ve observed this official guidance despite recent data indicating a sluggish economy, such as Q2 2025 GDP growth coming in at a disappointing 4.8%. Furthermore, the latest trade statistics for July 2025 showed a notable year-over-year drop in exports. These fundamentals normally suggest a weaker currency, making the PBOC’s strong stance particularly significant.
This strategy mirrors the approach we saw back in 2023 and 2024, when the central bank consistently set the daily fix stronger than market forecasts to temper depreciation pressures. The historical pattern suggests that while the broader trend may be weakness, the authorities will actively resist sharp, disorderly moves. This makes betting on a sudden currency collapse a risky proposition.
Trading Strategies Amid Yuan Stability
For traders, this managed environment suggests that implied volatility will likely remain suppressed in the coming weeks. Selling short-dated options, such as strangles on the offshore yuan (USD/CNH), could be a viable strategy to capitalize on the tight trading range enforced by the +/- 2% band. Current one-month implied volatility is already trading near historical lows, reflecting this expectation of stability.
However, the underlying fundamentals and significant interest rate differential with the US, where rates remain elevated, still favor a weaker yuan over the long term. This suggests that while short-term bets on volatility may not pay off, longer-dated positions, like buying USD/CNY call options with expirations several months out, could capture the slow, managed depreciation. This allows traders to align with the fundamental trend without fighting the central bank’s daily interventions.
