The People’s Bank of China (PBOC) sets the daily midpoint of the yuan using a managed floating exchange rate system. This allows the currency to fluctuate within a +\/- 2% band around the central reference rate. The midpoint is determined each morning, taking into account factors like market supply and demand and international currency fluctuations.<\/p>\n
Managing The Yuan’s Fluctuations <\/p>\n
The yuan can move within this specified range around the midpoint during a trading day. If the yuan’s value nears the band’s limit or shows excessive volatility, the PBOC may intervene by trading currency to stabilise its value, ensuring a controlled adjustment. The PBOC might adjust the trading band’s size based on economic conditions and policy aims.<\/p>\n
We are looking at an expected USD\/CNY reference rate of 7.1742 for today. This signals the central bank’s continued effort to manage the yuan’s depreciation against a strong dollar. This level is likely stronger than what market forces alone would dictate, a pattern we’ve seen for many months.<\/p>\n
Recent data shows China’s manufacturing PMI for July dipped to 49.5, indicating a slight contraction and ongoing economic softness. This, combined with a struggling property sector, pressures the central bank to keep monetary policy loose. This policy stands in contrast to a US dollar that remains elevated, even with the Federal Reserve pausing its rate hikes.<\/p>\n
Volatility And Trading Strategy<\/p>\n
Given this managed environment, we anticipate suppressed volatility in the coming weeks. Selling options on the offshore yuan (USD\/CNH) to collect premium might be a viable strategy, as the PBOC’s actions limit sharp, unexpected moves. This is because the +\/- 2% trading band acts as a ceiling and floor on daily price action.<\/p>\n
We saw a similar dynamic throughout much of 2024, where the central bank consistently set strong fixes to counter fundamental economic weakness. During that period, implied volatility on USD\/CNH options remained relatively low despite underlying bearish sentiment on the yuan. This historical precedent supports the view that the authorities will prevent a disorderly currency decline.<\/p>\n
Create your live VT Markets account<\/a>\u00a0and\u00a0start trading<\/a>\u00a0now. <\/b><\/p>\n","protected":false},"excerpt":{"rendered":" The PBOC sets the yuan’s daily midpoint, allowing controlled fluctuations within a \u00b12% trading band.<\/p>\n","protected":false},"author":62,"featured_media":16961,"comment_status":"closed","ping_status":"open","sticky":false,"template":"","format":"standard","meta":{"_acf_changed":false,"footnotes":""},"categories":[59],"tags":[],"class_list":["post-27618","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-ca\/wp-json\/wp\/v2\/posts\/27618","targetHints":{"allow":["GET"]}}],"collection":[{"href":"https:\/\/www.vtmarkets.com\/en-ca\/wp-json\/wp\/v2\/posts"}],"about":[{"href":"https:\/\/www.vtmarkets.com\/en-ca\/wp-json\/wp\/v2\/types\/post"}],"author":[{"embeddable":true,"href":"https:\/\/www.vtmarkets.com\/en-ca\/wp-json\/wp\/v2\/users\/62"}],"replies":[{"embeddable":true,"href":"https:\/\/www.vtmarkets.com\/en-ca\/wp-json\/wp\/v2\/comments?post=27618"}],"version-history":[{"count":0,"href":"https:\/\/www.vtmarkets.com\/en-ca\/wp-json\/wp\/v2\/posts\/27618\/revisions"}],"wp:featuredmedia":[{"embeddable":true,"href":"https:\/\/www.vtmarkets.com\/en-ca\/wp-json\/wp\/v2\/media\/16961"}],"wp:attachment":[{"href":"https:\/\/www.vtmarkets.com\/en-ca\/wp-json\/wp\/v2\/media?parent=27618"}],"wp:term":[{"taxonomy":"category","embeddable":true,"href":"https:\/\/www.vtmarkets.com\/en-ca\/wp-json\/wp\/v2\/categories?post=27618"},{"taxonomy":"post_tag","embeddable":true,"href":"https:\/\/www.vtmarkets.com\/en-ca\/wp-json\/wp\/v2\/tags?post=27618"}],"curies":[{"name":"wp","href":"https:\/\/api.w.org\/{rel}","templated":true}]}}