The People’s Bank of China (PBOC) sets the daily midpoint of the yuan, also called renminbi, through a managed floating exchange rate system. This allows the currency’s value to vary within a specific range, currently at +/- 2%, around a central reference known as the midpoint.

Every morning, the PBOC establishes a midpoint for the yuan relative to a basket of currencies, primarily focusing on the US dollar. This decision considers market supply and demand, economic indicators, and international currency market changes.

The Defined Range

The PBOC permits the yuan to move within the defined range of +/- 2% around the midpoint. This means the yuan can appreciate or depreciate by a maximum of 2% during a trading day, though the range can be altered by the PBOC as per economic needs and policy goals.

Should the yuan’s value near the trading band limits or face high volatility, the PBOC may intervene by buying or selling the yuan. Such measures aim to stabilise the currency’s value, ensuring a controlled and smoother adjustment process.

With this framework in place, traders are watching not only the daily midpoint fix but also the extent to which the currency is testing the upper and lower boundaries of its allowed range. What we are seeing is a deliberate balance between market forces and central bank control. The fix acts as a guiding reference, but the PBOC is not allowing unchecked fluctuations—it’s carefully managing the band to prevent abrupt moves that could unsettle broader market confidence.

Zhou’s institution, by setting the midpoint, essentially sets the tone for the day’s trading. When the midpoint is set stronger than expected, it often signals a desire to temper depreciation pressures. Conversely, a weaker-than-anticipated fix can be a sign that authorities are willing to tolerate some softness in the yuan, possibly to support export competitiveness or react to external headwinds.

Midpoint Signals

It’s important to highlight that, when the fix is consistently wide of market indications, it tells us more than just investor sentiment; it reflects targeted calibration by policymakers. These midpoint divergences can provide opportunities for those trading on expectations of policy bias or divergences from macro fundamentals. Timing becomes key. The morning release of the fix gives us only a narrow window to assess positioning before price discovery begins in earnest.

Yuan movements near either end of the trading band, particularly when they persist over consecutive sessions, have historically prompted action from authorities. Intervention isn’t constant, but when it comes, it is purposeful. Here, traders need to be alert to subtle shifts in onshore liquidity conditions or sudden reversals in offshore yuan pricing, both of which can hint at official activity.

We’re noticing that short-dated implied volatilities have remained subdued, suggesting that the market does not anticipate sharp moves—at least for now. But this calm can be misleading. The price of options might not reflect underlying directional bias as directly as spot trends do, but the skew in pricing still communicates a lot. Steepening risk reversals to one side can signal more defensive positioning even when spot is rangebound.

For us, the key is not just tracking where the currency is going, but how it gets there. Is it gliding along stable volumes? Is there a divergence between onshore and offshore prices? Are forwards beginning to widen against the fix? If so, we adjust—either by reassessing hedging strategies or by looking for mismatches between forward assumptions and daily central bank guidance.

Chen’s recent commentary reinforced this view. Signals from policymakers often emerge indirectly—through subtle intervention tactics, limited communication, or adjustments in the reference basket itself. These aren’t always easy to interpret. But when we pair these observations with movement in swaps or non-deliverable forward pricing, they become more actionable.

For now, we lean more heavily on intraday patterns than longer trend models. Especially when monetary authorities are this active in shaping daily expectations, it pays to track incremental moves—how quickly crosses react to fresh midpoint data, whether there’s sudden accumulation in near-dated options, or if hedge ratios begin to change in correlation with global risk flows.

There’s an immediate need to adjust tactical risk thresholds when we get several midpoint fixes that break with previous momentum. When this happens, we review delta exposures, rebalance positions in offshore forwards, and pay special attention to divergences between US dollar liquidity and Asian FX flows.

In short, the intricate dance between central bank preferences and market pricing mechanisms opens up opportunities for those who are paying close attention to the signals each morning. Long-term alignment with external balance metrics remains a factor, but locking in shorter-term directional views often comes down to parsing the message carried each day in that PBOC fix—and how far markets are willing to challenge it.

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