The People’s Bank of China (PBOC) is expected to set the USD/CNY reference rate at 7.1359, based on Reuters estimates. The bank sets the daily midpoint for the yuan, or renminbi (RMB), against a basket of currencies, mostly focusing on the US dollar.
The PBOC employs a managed floating exchange rate system, allowing the yuan to fluctuate within a +/- 2% range around the central reference rate. Each morning, the daily midpoint is established, considering market supply and demand, economic indicators, and global currency market shifts.
Midpoint Guidance
The established midpoint provides a reference for that day’s trading activities. The trading band allows the yuan to adjust within a defined range around this midpoint, with a maximum 2% appreciation or depreciation during any trading day.
Should the yuan’s value approach the limits of this trading band or encounter excessive volatility, the PBOC may step in, buying or selling the yuan. Such actions are aimed at stabilising its value, ensuring controlled changes to the currency’s position in the market.
With the People’s Bank of China expected to set the USD/CNY midpoint at 7.1359, we are seeing a continued effort to stabilize the yuan. This strong guidance signals that the central bank intends to prevent rapid depreciation, much like it did throughout 2023 and 2024. For derivative traders, this suggests that the currency will likely remain within a tight range in the near term.
The fundamental pressure for a weaker yuan persists due to the interest rate differential with the US, where 10-year Treasury yields are holding firm around 3.9%. Furthermore, China’s own economic data, such as the slightly disappointing 4.8% GDP growth reported for the second quarter of 2025, points towards a sluggish domestic recovery. This backdrop makes the PBOC’s daily management of the exchange rate the most critical factor for traders to watch.
Trading Strategies
Given the bank’s active management, implied volatility on USD/CNH options has been suppressed, with one-month volatility recently touching 3.5%, a significant low. This environment makes selling options an attractive strategy for generating income. Traders should consider selling short-dated strangles, which profit as long as the currency pair does not make a large move in either direction.
For those anticipating a gradual, controlled depreciation, using option spreads is a prudent approach. Buying simple call options may be inefficient due to time decay in a range-bound market. Instead, we see value in using bullish call spreads, which cap potential profits but lower the initial cost and risk.
Looking back, we saw a similar pattern in late 2023 when the spot rate remained pinned near the weak end of its 2% trading band for months due to persistent central bank guidance. That period showed that betting against the PBOC’s control is a difficult trade. Therefore, strategies that align with a managed, slow-moving currency seem most appropriate for the coming weeks.
