The People’s Bank of China (PBOC) sets the daily midpoint for the yuan, also known as renminbi. This is part of a managed floating exchange rate system allowing the yuan’s value to move within a specific range, currently set at +/- 2%, around this central reference rate.

Each morning, the PBOC determines the midpoint against a basket of currencies, with the US dollar being the primary reference. The bank considers market supply and demand, economic indicators, and international currency market changes. This midpoint serves as a base point for that day’s trading activities.

The Daily Midpoint And Trading Band

The PBOC permits the yuan to fluctuate within a +/- 2% range around the midpoint. This trading band may be adjusted by the bank according to economic conditions and policy objectives.

If the yuan’s value approaches the trading band’s limit or becomes excessively volatile, the PBOC may step in. The bank can stabilise the yuan’s value by buying or selling the currency in the foreign exchange market. Such interventions aim to control and smoothly adjust the currency’s value over time.

What we’ve explained above is essentially how the Chinese central bank—through tightly controlled but flexible tools—guides the daily movements of the yuan. They don’t let it float entirely free, nor do they lock it in place. Rather, there’s a dynamic midpoint set each morning, acting as the anchor for the day’s allowable price range, and that midpoint is based in part on a mix of global currency movements.

The use of a currency basket, while designed to reflect broader market movements, remains heavily skewed toward the dollar. We’re seeing that although this technique adds a layer of responsiveness, it still relies on Washington’s performance, which means macroeconomic events across the Pacific—such as shifts in Federal Reserve policy or US Treasury yields—are felt sharply. This link to the dollar remains a steady source of volatility in otherwise measured or domestically-driven decisions from Beijing.

Now, these mechanisms are more than just monetary formality. They’ve become increasingly relevant over the past few weeks as onshore and offshore liquidity pressures have built up. Traders have seen tightening in offshore yuan markets, which often signals that authorities are gently discouraging speculative selling without making an obvious move. At the same time, the fixings have been persistently firmer than expected by traditional models. That suggests a deliberate push to keep the yuan from drifting too far down, even if other fundamentals point in that direction.

Market Movements and Intervention Strategies

Going into the next stretch of trading, we should be paying attention not just to the daily midpoint level, but also to how much it deviates from consensus models. Consistent overestimation or underestimation can leave arbitrage windows open, and while those might be brief, they do carry risk if directional positions aren’t adjusted rapidly. In short, if you see four or five days in a row where the fixing is heavily managed in one direction, it’s often a prelude to administrative action—sometimes through liquidity tools, sometimes through outright market activity via state banks.

Given external pressures from both the dollar and global liquidity, we find that spreads between the onshore and offshore yuan can widen abruptly, especially during volatile overnight sessions. That disconnect is more than cosmetic. It’s used, subtly, as a signalling method when intervention isn’t immediately visible. When you see the offshore yuan weakening but the central bank still setting a stronger-than-expected midpoint, it’s usually a message rather than an oversight.

Interest rate differentials still matter, but earnings season and trade data are also feeding into models that the PBOC likely references. A sharper-than-expected trade surplus, for instance, tends to justify firmer midpoint fixings, but if the offshore market shrugs that off and still trades weaker, that’s when we may begin to see forward curves widening, and a possible return of swap-point tension.

From a positioning standpoint, patience is rarely a bad thing, but exposure to currency-sensitive derivatives should factor in latent policy motivations that don’t show up in the economic calendar. We’ve noticed a tendency for greater intraday volatility when policy cycles abroad don’t align with local guidance. For example, sharp moves in US treasury yields may cause quick re-pricing in CNH forwards, even if Beijing’s official stance seems unchanged.

We’re entering a narrower window where onshore volume data and daily fixings need to be interpreted together. In the past, one could lean heavily on either, but now decisions are appearing more synchronised—and less generous in signalling ahead of time.

Those using volatility strategies in the options market, especially delta-neutral ones, may find that realised vol remains lower-than-implied unless there’s a catalyst. That said, be prepared for exaggerated reactions during low volume days. Often, state-owned banks act through sudden spikes in bid-ask spreads in offshore markets. These are not accidental, and watching for them gives a clearer picture of future bandwidth tightening.

We’ve kept a close watch on overnight repo rates in Hong Kong, and when they tick higher while the onshore yuan stays stable within the band, it’s often a prelude to limited carry opportunities. In this setting, rolling short-dated structures may no longer offer the flexibility they did just a few weeks ago.

So, in the near term, what counts is less where the yuan is trading now, and more where divergence opens up between policy signals and market response. Traders well positioned to interpret that gap may avoid being caught off-side.

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