The People’s Bank of China (PBOC) sets the daily midpoint of the yuan, also known as the renminbi, using a managed floating exchange rate system. This system permits the yuan to fluctuate within a predetermined range, or “band,” around a central reference rate. Currently, this fluctuation range is set at +/- 2%.
Determining The Midpoint
Each morning, the PBOC determines a midpoint for the yuan against a basket of currencies, primarily focusing on the US dollar. The midpoint considers factors like market supply and demand, economic indicators, and the international currency market status. This midpoint acts as the reference point for the day’s trading activities.
The PBOC allows the yuan to move within a +/- 2% band around the midpoint, meaning it can appreciate or depreciate up to 2% from the midpoint in a single trading day. The central bank may alter this range based on economic conditions and policy goals. If the yuan nears the limits of the trading band or experiences excessive volatility, the PBOC intervenes in the foreign exchange market. This intervention involves buying or selling the yuan to ensure stability and a gradual currency adjustment.
The expected USD/CNY fixing near 7.18 suggests the People’s Bank of China is continuing its policy of managed depreciation. We see this as an official signal to prevent an uncontrolled slide in the yuan’s value. This approach is consistent with actions over the past few months, where the central bank has consistently set the daily rate stronger than market forecasts to temper weakening pressure.
China’s latest economic figures from the second quarter of 2025 showed GDP growth at 4.8%, just missing the official 5% target, which may tempt policymakers to allow a weaker currency to boost exports. However, this is balanced by concerns over capital outflows, which a rapidly falling yuan could accelerate. The US Federal Reserve’s decision last month to maintain a hawkish stance also keeps the dollar strong, adding to the pressure.
Derivative Trading Strategies
For derivative traders, this controlled environment suggests that strategies built around a slow, grinding depreciation of the yuan are more sensible than betting on a sharp collapse. Selling volatility could be an attractive option, as the PBOC’s management and the +/- 2% trading band make large, unexpected daily swings unlikely. We should remain focused on options strategies that profit from low volatility, such as iron condors.
We can look back to a similar period of pressure in late 2023 when the USD/CNY rate pushed towards the 7.30 level. Back then, the PBOC responded with persistently strong fixings and directed state banks to support the currency, effectively placing a ceiling on the dollar’s rise. It is reasonable to speculate that we will see similar defensive measures if the yuan weakens significantly in the coming weeks.
