The People’s Bank of China (PBOC) oversees the daily midpoint setting of the yuan, also known as renminbi. The PBOC utilises a managed floating exchange rate system.
This system permits the yuan’s value to oscillate within a specific range termed a “band.” The band is set at +/- 2% around the central reference rate.
Recent Update
In a recent update, the closing rate was recorded at 7.1207.
With the yuan last closing at 7.1207, we are watching the daily midpoint fixing very closely for signs of official direction. The core tension remains the People’s Bank of China’s desire for stability against the strong US dollar, which is supported by the Federal Reserve’s “higher-for-longer” rate policy confirmed last week. This interest rate difference, with US bond yields remaining over 200 basis points above China’s, creates a natural pressure for the yuan to weaken.
For weeks, the central bank has been setting the daily midpoint significantly stronger than market forecasts, a clear signal it intends to prevent a rapid decline. For instance, recent fixes have been around 100 pips stronger than the average street estimate, a pattern we also saw back in late 2023 when the currency was under pressure. This defensive stance suggests that any bets on a sharp, uncontrolled depreciation are risky in the short term.
This active management by the PBOC is likely to suppress volatility in the coming weeks, pinning the currency within its 2% trading band. As a result, selling options to collect premium, such as through short straddles or iron condors on the offshore CNH, could be a viable strategy. Current one-month implied volatility is sitting at a modest 4.5%, reflecting market expectations of a controlled environment.
Longer Term Pressure
While the immediate downside is capped, the underlying economic data, like August’s weaker-than-expected 4.1% industrial output, points to longer-term weakening pressure. We should therefore consider longer-dated derivative structures that bet on a gradual depreciation, such as buying 3-to-6 month call options on USD/CNH. This allows us to position for a potential slide while limiting risk from the central bank’s daily interventions.
