The People’s Bank of China (PBOC) determines the daily midpoint of the yuan, also referred to as renminbi (RMB). It employs a managed floating exchange rate system that permits the yuan’s value to vary within a +/- 2% band around a central reference rate.
As of the last closure, the yuan was valued at 7.3130. The fluctuation mechanism maintains a balance in the currency’s trading value against other currencies.
Exchange Rate Management
This mechanism, set by the People’s Bank of China through the daily midpoint, effectively provides a ceiling and floor for the yuan’s exchange rate within the permitted band. The goal is to keep conditions stable while allowing a degree of flexibility in day-to-day trading. By leaning into this setup, the central bank can steer market sentiment without resorting to direct intervention—unless necessary. Despite allowing for some movement, this isn’t full liberalisation, and foreign exchange participants still gauge momentum largely through signals from the central bank itself.
Wang’s recent comments hint at a strategic inclination not to allow sharp depreciation—indicated by the consistency in stronger-than-expected fixings. There’s little deviation from policy continuity. When combined with seasonal patterns, including weaker external demand and corporate dollar demand ahead of month-end, it creates more downside pressure on the yuan. Even so, actual fixes have diverged from model-based expectations by a widening spread, suggesting direct guiding influence. It’s not passive calibration; it’s managed intent.
For us watching these dynamics closely, the key is the gap between model-implied fixes and the actual announced rate. That deviation tells us more than headlines do. It’s not enough to follow risk sentiment or U.S.-China bond yield differentials on their own. The pullbacks in the yuan have been orderly but noticeably contained despite broader dollar strength. These narrower fluctuations imply a view from Beijing that abrupt moves would be unwelcome at this point.
Policy and Stability
Liu has also hinted in recent remarks that capital flow pressures are tolerable under current account surpluses, keeping intervention limited but steady. We interpret that as a green light for near-term stability in the yuan, albeit within an appreciation bias. Speculative bets on sharp weakening are being quietly discouraged through official channels. Traders need to track liquidity operations too, as minor adjustments there often precede tone shifts in the fixings.
Judging by how the band is being respected and how tightly it’s maintained, policymakers are navigating growth risks without amplifying volatility. In response, we prefer maintaining tight spreads when constructing hedge strategies around dollar-yuan forwards. Using options with shorter expiry windows can also be preferable until implied volatility offers more attractive entry points. Recent pricing doesn’t favour long gamma positions unless there’s a material shift from the current central bank posture.
From where we stand, watching this gradual guiding hand is more instructive than leaning on reactionary positioning. We favour measured, reactive strategies rather than directional bets, given the pattern of repeated constraints. If model-based fair value drifts far from guidance again, that’s worth recalibrating exposure.
Yuan resilience for now is less about strength and more about preference—an intention to show poise.
