The People’s Bank of China (PBOC) determines the daily midpoint for the yuan, also known as renminbi or RMB. This is part of a managed floating exchange rate system that allows the currency to move within a designated range or “band” around this reference rate.
The permitted fluctuation range is +/- 2%. Today, the PBOC set the USD/CNY midpoint at 7.1062. This is lower than the market’s estimate of 7.1359, with the previous closing rate being 7.1250.
The Central Bank’s Signal
Today’s significantly stronger-than-expected midpoint fixing is a clear signal from the People’s Bank of China. They are indicating a low tolerance for further rapid depreciation of the yuan. We should interpret this as the central bank drawing a line in the sand to manage market expectations.
This action makes selling call options on the USD/CNY pair an attractive strategy for the coming weeks. The central bank’s intervention effectively caps the upside potential for the dollar against the yuan. This environment of managed stability reduces implied volatility, making option premiums, particularly for calls, appear rich.
This move is supported by recent data showing China’s industrial production for August 2025 grew by a surprising 4.5% year-over-year, beating market forecasts. Furthermore, reports indicate that capital outflows, a major concern throughout 2024, have slowed considerably in the third quarter of 2025. The PBOC likely feels it now has the fundamental support to defend the currency more forcefully.
From our perspective, this feels different from the market shocks we saw around the 2015 devaluation. Back then, the central bank’s actions created uncertainty and volatility. Today’s move is aimed at curbing volatility and projecting an image of control and stability for the currency.
Currency Risk Reduction
The perceived reduction in currency risk makes carry trades involving the yuan more viable. With the one-month offshore yuan’s (CNH) implied volatility dropping to 4.5% today, the cost of hedging has decreased. This stability is crucial for traders looking to profit from interest rate differentials without being wiped out by a sudden currency move.
However, we must watch for any signs that this policy is not sustainable. A downturn in the next purchasing managers’ index (PMI) survey or a flare-up in trade tensions could force the PBOC to change its stance. Therefore, holding some cheap, long-dated USD/CNY call options as a tail-risk hedge would be a prudent measure against a policy reversal.
