The People’s Bank of China (PBOC) sets the daily midpoint for the yuan, influencing its exchange rate. This system allows the yuan to fluctuate within a specified range or “band” around this midpoint, which is set at +/- 2% for now.
Every morning, the PBOC determines a midpoint for the yuan against a basket of currencies, with a focus on the US dollar. This process considers market factors and economic indicators and serves as a reference for daily trading.
The Yuan Trading Band
The yuan is allowed to move within a +/- 2% range around the midpoint during a single trading day, though this range can be adjusted by the PBOC. If the yuan nears the band limits or shows excessive volatility, the PBOC may intervene.
Intervention involves the PBOC buying or selling the yuan to help stabilise its value. This action aids in keeping the currency’s adjustment controlled and gradual, accommodating economic conditions and policy aims.
The expected USD/CNY reference rate of 7.1225 signals that authorities are continuing to manage a slow depreciation of the yuan. This follows a trend seen throughout the summer of 2025, where a strong US dollar, fueled by the Federal Reserve holding interest rates steady, has put pressure on emerging market currencies. We see this managed rate as a clear sign of prioritizing stability over allowing the market to dictate a faster decline.
Implications For Derivatives And Long Term Outlook
For derivatives, this heavy-handed management by the PBOC suggests that implied volatility will likely remain suppressed in the short term. Looking back, we saw a similar pattern of strong guidance throughout 2024, where the daily fix was consistently set stronger than market estimates to prevent speculative selling. This makes selling short-dated options, which profit from low volatility and time decay, a viable strategy for the coming weeks.
However, the underlying economic data points to a different long-term story. China’s most recent export data for August 2025 showed a 2.1% year-over-year decline, marking the third consecutive month of negative growth. Traders should therefore consider using longer-dated forward contracts or options to position for a weaker yuan, anticipating that the central bank may eventually have to allow for more depreciation to support the economy.
The main indicator to watch is the spread between the daily market estimate and the PBOC’s official fixing. For much of 2025, this spread has been over 800 pips, showing a strong bias from the bank. If we see this spread begin to narrow in the coming weeks, it would be the first hint that policymakers are becoming more comfortable with a weaker currency.
