The People’s Bank of China (PBOC) is tasked with setting the daily midpoint for the yuan, also known as the renminbi or RMB. Under a managed floating exchange rate system, the yuan’s value can oscillate within a set range, or “band,” of +/- 2% around a central reference rate or “midpoint.”
The previous closure for the yuan was recorded at 7.1809. The PBOC has injected 187.5 billion yuan via 7-day reverse repos, maintaining a 1.40% rate.
Monetary Stimulus And Its Impact
We see the injection of 187.5 billion yuan as a move to ease financial conditions and support the domestic economy. This type of monetary stimulus typically puts downward pressure on a currency’s value by making it less attractive to hold. For derivative traders, this action confirms a fundamental headwind for the yuan in the coming weeks.
However, we must pay close attention to the daily midpoint setting, which acts as the primary signal of policy intent. The central bank has been consistently setting this reference rate at a stronger level than market forecasts, a clear tactic to prevent rapid depreciation. This creates a managed conflict, where authorities tolerate weakness but will actively fight against disorderly selling.
This policy tension is driven by challenging economic data. China’s official manufacturing Purchasing Managers’ Index (PMI) unexpectedly fell to 49.5 in May, indicating a contraction in factory activity and justifying the need for more stimulus. This forces the bank to prioritize domestic support, even if it complicates its goal of maintaining a stable exchange rate.
Avoiding Market Volatility
We believe the memory of the 2015 devaluation, which sparked global market volatility after a sudden drop, is guiding the current cautious approach. The goal now is to avoid a repeat of that shock by engineering a slow, controlled slide instead of a sharp break. This history suggests a strong preference for stability over abrupt market-driven moves.
Given these opposing forces, traders should not position for a dramatic collapse in the currency’s value. We advise using options to bet on a gradual depreciation, such as selling out-of-the-money calls on the dollar-yuan pair to collect premium. The +/- 2% band will likely be defended, making strategies that profit from range-bound movement and low volatility more sensible than outright shorting.
