The People’s Bank of China (PBOC) sets the daily midpoint for the yuan (RMB) using a managed floating exchange rate system. This allows the currency to fluctuate within a designated “band” around the midpoint, currently at +/- 2%.
Each morning, the PBOC determines the midpoint for the yuan against a basket of currencies, focusing on the US dollar. This is based on market factors like supply and demand, economic indicators, and international currency fluctuations. The midpoint acts as the reference for that day’s trading.
Yuan Trading Band
The yuan can move within a specified range around the midpoint, which is currently set at +/- 2%. This means the yuan can either appreciate or depreciate by up to 2% from the midpoint in one trading day. The PBOC may adjust this range according to economic conditions and policy needs.
If the yuan nears the trading band’s limit or shows intense volatility, the PBOC may intervene in the market. They do this by buying or selling the yuan to control its value, ensuring a stable and progressive currency adjustment.
With the People’s Bank of China expected to set the USD/CNY reference rate at 7.1559, we are seeing an official acknowledgment of the yuan’s recent weakness. This is a signal that authorities may be willing to guide the currency lower in a controlled manner. For traders, this reinforces a strategy of positioning for a stronger dollar against the yuan.
This potential fixing level gives the spot rate more room to depreciate within its daily trading band. A midpoint of 7.1559 means the yuan could weaken up to 7.2990 before hitting the 2% upper limit of its band. We should consider buying USD/CNY call options with strike prices in the 7.25 to 7.30 range to profit from this expected directional move.
Economic Outlook and Trade Strategy
The economic backdrop supports this view, as we have seen China’s export growth figures for the second quarter of 2025 come in below expectations. Meanwhile, the U.S. Federal Reserve has maintained its hawkish stance on interest rates throughout this year, continuing the policy divergence that began back in 2022. This interest rate differential, with U.S. rates at 5.25% and China’s benchmark rate at 3.45%, continues to draw capital towards the dollar.
However, we must remain cautious about the pace of any depreciation. Looking back at the central bank’s actions during 2023 and 2024, we saw them consistently set the daily fix stronger than market estimates to prevent disorderly moves. This history suggests that while the direction is down for the yuan, the path will be managed and gradual.
Given the likelihood of intervention to slow the decline, implied volatility in the options market may not spike significantly. This means that while buying options for a directional bet makes sense, we should be wary of overpaying for them. Structured products that profit from a slow, grinding move higher in USD/CNY, rather than a sharp breakout, could be more effective.
