The People’s Bank of China (PBOC) sets the daily midpoint of the yuan against a basket of currencies, primarily the US dollar, as part of a managed floating exchange rate system. This system allows the yuan to fluctuate within a narrow range of +/- 2% around the central reference rate, also known as the “midpoint.”

Each morning, the PBOC establishes this midpoint by considering factors such as market supply and demand, economic indicators, and international currency market changes. This midpoint acts as a reference point for that day’s trading. The trading band, set at +/- 2%, allows for the yuan’s value to increase or decrease by up to 2% from the midpoint within the trading day.

Foreign Exchange Market Intervention

The PBOC intervenes in the foreign exchange market if the yuan’s value reaches the band limits or faces excessive volatility. This intervention involves buying or selling the yuan to stabilise its value, ensuring controlled adjustments in the currency’s value. This approach supports economic stability and aligns with China’s monetary policy objectives.

The expected reference rate of 7.1159 signals that the central bank intends to maintain stability in the yuan. This strong “fix” suggests a deliberate effort to prevent the currency from weakening too quickly, which should reduce expectations of major price swings in the immediate future. For derivative traders, this points towards a period of managed, low volatility.

We should factor in the broader economic context from recent months. Throughout 2025, the US dollar has remained firm due to the Federal Reserve keeping interest rates elevated, while recent data showed China’s exports fell by 5% year-over-year in August. These forces naturally push the USD/CNY rate higher, meaning the central bank is actively leaning against market pressure with this fixing.

This active management has pushed down the cost of options, with one-month implied volatility for USD/CNY falling to around 3.5%, down from over 5% earlier in the year. This makes strategies that profit from low volatility, like selling straddles, more appealing for traders betting the exchange rate will stay in a tight range. It is a calculated risk that the central bank’s control will hold steady over the next few weeks.

Historical Precedent and Risk Assessment

We have seen this strategy from the central bank before. Looking back to late 2023, the PBOC consistently set strong reference rates to slow the yuan’s depreciation as it approached the 7.35 mark. This historical precedent gives us confidence that their current stance is a credible attempt to anchor the currency.

However, the main risk is how long policy can resist fundamental pressure. Traders must watch the spread between the daily midpoint and the spot price, which trades in a +/- 2% band. If the spot rate consistently pushes against the weak end of its band, near 7.2582, it would be a warning sign that the central bank’s grip is weakening.

For those with commercial interests, the current low implied volatility presents an opportunity for cost-effective hedging. Businesses needing to buy US dollars can purchase call options to protect against a potential sudden weakening of the yuan. The premiums on these options are cheaper now than they would be in a more volatile market.

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