Insights 
VT 
The People’s Bank of China (PBOC) sets the daily midpoint for the yuan, also known as the renminbi. This midpoint is against a basket of currencies, with the US dollar being a primary component. The value of the yuan can fluctuate within a designated range, or “band,” around this reference rate.
Yuan Fluctuation Band
The PBOC allows the yuan to move within +/- 2% around the midpoint during a trading day. This allows the yuan to appreciate or depreciate by a maximum of 2% from the midpoint. Economic indicators and market conditions influence the setting of the midpoint.
In cases where the yuan approaches the limit of the trading band or shows excessive volatility, the PBOC may intervene. This involves buying or selling the yuan to maintain stability. Such intervention ensures a controlled and gradual adjustment of the yuan’s value, aligning with economic conditions and policy goals.
The expected USD/CNY reference rate near 7.1405 indicates that the central bank is continuing to permit a managed depreciation of the yuan. We see this as a necessary response to ongoing domestic economic challenges and the relative strength of the US dollar. The managed system ensures that any currency movements will be gradual and controlled within the established trading band.
This outlook is reinforced by economic data from August 2025, which showed China’s manufacturing PMI at a slightly contractionary 49.7 and a persistent softness in the property market. In contrast, the US Federal Reserve has signaled it will hold interest rates steady to combat lingering inflation, creating a policy divergence that favors a stronger dollar. This fundamental gap continues to place upward pressure on the USD/CNY exchange rate.
Market Positioning Strategy
Given the PBOC’s firm control, we expect implied volatility on USD/CNY options to remain relatively low. This environment makes buying options, such as USD calls, an efficient way to position for further, gradual yuan weakness. The low cost of these derivatives offers a favorable risk-to-reward profile for a directional move towards the 7.20 level.
We saw a similar pattern unfold during the economic slowdown of 2023, where the central bank allowed the yuan to weaken past the 7.30 mark to support its export sector. Based on this historical precedent, traders should view the current policy as a signal that officials are prioritizing economic stability over currency strength. Therefore, positioning for a higher USD/CNY rate remains the primary strategy in the coming weeks.
However, traders must remain watchful for signs of intervention if the depreciation becomes disorderly. The +/- 2% band is a firm daily limit, and we have historically observed state-owned banks selling dollars to prevent the currency from falling too quickly. Any such action would signal a temporary halt to the yuan’s decline and would be a cue to protect profits on long USD positions.
