The People’s Bank of China (PBOC) sets the daily midpoint for the yuan, known as renminbi (RMB), using a managed floating exchange rate system. This system allows the yuan’s value to fluctuate within a specified range, or “band,” of +\/- 2% around a central reference rate.<\/p>\n
Each morning, the PBOC determines a midpoint for the yuan against a basket of currencies, with the US dollar being a primary focus. The central bank considers market supply and demand, economic indicators, and international currency market fluctuations when setting this midpoint.<\/p>\n
The PBOC allows the yuan to move within a defined trading band, permitting a maximum appreciation or depreciation of 2% from the midpoint in a single trading day. This range can be adjusted by the central bank based on prevailing economic conditions and policy goals.<\/p>\n
Should the yuan’s value approach the extremes of the trading band or exhibit excessive volatility, the PBOC may engage in market interventions. By buying or selling the yuan, the central bank aims to stabilise its value, ensuring a controlled and gradual adjustment.<\/p>\n
Based on the central bank’s process, we should view the daily reference rate as the most important signal for short-term direction. The consistent trend of setting the fixing stronger than market estimates shows a clear policy desire to prevent rapid yuan depreciation. This official guidance creates a headwind against any trades betting on a significantly weaker currency in the immediate future.<\/p>\n
The managed nature of the currency, with its explicit trading band, suggests that implied volatility should remain suppressed. We see current one-month implied volatility for USD\/CNH options hovering near a relatively low 4.2%, making strategies that profit from low and declining volatility attractive. Selling option premium through structures like short straddles or strangles could be a viable approach for us.<\/p>\n
However, we must weigh this against fundamental economic data, which points to weakness and puts natural downward pressure on the currency. For instance, China’s exports fell 7.5% year-over-year in May, and youth unemployment recently hit a record high above 20%. These figures suggest that the central bank is actively fighting market fundamentals to maintain stability, creating a tension traders must respect.<\/p>\n
Given the defined +\/- 2% band, we believe range-bound strategies are particularly suitable. We can structure trades like iron condors with strikes set near the edges of this band, capitalizing on the high probability that the central bank will intervene to keep the currency within this predictable daily range. This allows us to collect premium while the authorities enforce stability.<\/p>\n
We must also consider historical precedent, such as the unexpected devaluation in August 2015, which caused a massive spike in volatility. While our base case is for continued stability enforced by the authorities, this historical event serves as a reminder of tail risk. Any positions we take should therefore be accompanied by strict risk management in case of a sudden policy shift.<\/p>\n
Create your live VT Markets account<\/a>\u00a0and\u00a0start trading<\/a>\u00a0now. <\/b><\/p>\n","protected":false},"excerpt":{"rendered":" The PBOC sets a daily yuan midpoint, allowing 2% fluctuations and intervenes to maintain stability.<\/p>\n","protected":false},"author":62,"featured_media":16967,"comment_status":"closed","ping_status":"open","sticky":false,"template":"","format":"standard","meta":{"_acf_changed":false,"footnotes":""},"categories":[59],"tags":[],"class_list":["post-27241","post","type-post","status-publish","format-standard","has-post-thumbnail","hentry","category-live-updates"],"acf":{"acf_article_selection_author":null},"aioseo_notices":[],"_links":{"self":[{"href":"https:\/\/www.vtmarkets.com\/en-asia\/wp-json\/wp\/v2\/posts\/27241","targetHints":{"allow":["GET"]}}],"collection":[{"href":"https:\/\/www.vtmarkets.com\/en-asia\/wp-json\/wp\/v2\/posts"}],"about":[{"href":"https:\/\/www.vtmarkets.com\/en-asia\/wp-json\/wp\/v2\/types\/post"}],"author":[{"embeddable":true,"href":"https:\/\/www.vtmarkets.com\/en-asia\/wp-json\/wp\/v2\/users\/62"}],"replies":[{"embeddable":true,"href":"https:\/\/www.vtmarkets.com\/en-asia\/wp-json\/wp\/v2\/comments?post=27241"}],"version-history":[{"count":0,"href":"https:\/\/www.vtmarkets.com\/en-asia\/wp-json\/wp\/v2\/posts\/27241\/revisions"}],"wp:featuredmedia":[{"embeddable":true,"href":"https:\/\/www.vtmarkets.com\/en-asia\/wp-json\/wp\/v2\/media\/16967"}],"wp:attachment":[{"href":"https:\/\/www.vtmarkets.com\/en-asia\/wp-json\/wp\/v2\/media?parent=27241"}],"wp:term":[{"taxonomy":"category","embeddable":true,"href":"https:\/\/www.vtmarkets.com\/en-asia\/wp-json\/wp\/v2\/categories?post=27241"},{"taxonomy":"post_tag","embeddable":true,"href":"https:\/\/www.vtmarkets.com\/en-asia\/wp-json\/wp\/v2\/tags?post=27241"}],"curies":[{"name":"wp","href":"https:\/\/api.w.org\/{rel}","templated":true}]}}