(Bloomberg) -- Yuan trading volumes are collapsing before the Golden Week holiday as the central bank’s tightening grip on the currency reduces the room for traders to place directional bets.

The amount of dollar-yuan transactions slid below $10 billion Monday and was just $12 billion Tuesday, far below the daily average of about $30 billion over the past year, according to traders who asked not to be identified. The nation’s financial markets are shut from Friday and only reopen Oct. 9.

Trading levels are falling as the People’s Bank of China seeks to push back against the weakening trend for the currency by keeping its daily fixing in a narrow band despite the strengthening dollar.

The PBOC has set the fix within a range of just 20 pips for seven straight days through Wednesday, the longest such streak since 2019. That’s effectively capped the yuan’s trading limit below 7.32 per dollar given the currency is only allowed to fluctuate within 2% either side of the fixing. 

“Some market participants may delay their FX settlement due to the trading band restrictions” at a time when the PBOC is maximizing its effort to protect the currency against the dollar strength and deepening domestic woes, said Ken Cheung, chief Asia foreign-exchange strategist at Mizuho Bank Ltd. in Hong Kong.

The yuan strengthened as much as 0.3% to 7.2880 per dollar Wednesday after the PBOC vowed to correct one-way bets in the foreign-exchange market. State-owned banks sold a large amount of dollars to support the yuan, and their overseas units also reduced lending in the currency to squeeze offshore liquidity, according to traders who asked not to be named.

Options Muted

Trading in the options market is also being muted by the PBOC. The central bank has been reducing the supply of yuan available in Hong Kong, which has pushed up the cost of placing short bets on the currency. Hedge funds are showing little interest in trying to go long dollar-yuan via option trades against the PBOC despite rising US yields, according to Asia-based traders.

The heavy hand of the PBOC is also being felt in the offshore yuan, where a gauge of one-month implied volatility dropped to the lowest level since May last week.

Rising risk

Still, the central bank’s efforts to control the yuan through the daily fixing are far from a permanent solution to ease pressure on the currency, certainly as long as the economy remains weak. HSBC Holdings Plc, Morgan Stanley and Citigroup Inc. are already predicting growth will be under the official target of 5% this year.

The slide in liquidity not only prevent speculators from betting against the currency, but it also makes it harder for corporates and investors to hedge the currency risks on their China exposures. 

“The longer that the PBOC keeps a tight grip on the fixing, the greater the risk of a market shock when it eventually exits its policy,” Mizuho’s Cheung said. “We see significant event risk at the reopening of the yuan market after the long holiday, if the dollar extends its rally in the period.”

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