The People’s Bank of China (PBOC) sets the daily midpoint for the yuan, primarily against the US dollar. This involves a managed floating exchange rate allowing fluctuations within a +/- 2% range around a central reference rate.
Each morning, the PBOC establishes a midpoint by considering market supply, demand, economic indicators, and international currency market changes. This midpoint guides the day’s trading activities.
Yuan Trading Band
The trading band permits the yuan to adjust by up to 2% from the midpoint, depending on economic needs and policy goals. If value deviations approach the band limits or volatility rises, the PBOC may intervene by buying or selling yuan to ensure stability.
This managed approach enables the central bank to influence the currency’s value while allowing for controlled adjustments based on prevailing economic conditions.
The People’s Bank of China’s expected reference rate of 7.1157 signals a continued preference for a managed and stable yuan. This level, while slightly stronger than the lows we saw in late 2024, suggests authorities remain focused on supporting the economy. We’ve seen China’s Purchasing Managers’ Index (PMI) hover just above the 50 mark for the last two quarters, indicating that the manufacturing recovery is fragile and needs support from a competitive currency.
Impact on Derivative Traders
For derivative traders, the main takeaway is that the central bank’s firm control will likely keep implied volatility suppressed in the coming weeks. Looking back, one-month USD/CNY implied volatility has been trading in a tight range between 3.8% and 4.7% for most of 2025, far below the sharp spikes we witnessed in previous years. This environment makes strategies like selling short-dated options to collect premium potentially attractive, as big price swings are being actively discouraged by policymakers.
We expect the spot USD/CNY rate to continue testing the weaker end of its daily +/- 2% trading band, especially given the ongoing sluggishness in China’s property sector. However, the central bank’s consistent actions have established a firm policy ceiling near the 7.37 level throughout this year. This creates a well-defined range, suggesting that buying USD/CNY on dips toward the midpoint and selling near the top of the band could be a viable strategy for the near term.
