China’s decision to revalue the yuan has started small, but one analyst predicts it could be just the beginning-eventually putting a powder peg to commodity prices.
On Wednesday the Chinese government ended its decade-long practice of pegging the value of its currency to the U.S. dollar. Starting today the value of the yuan will be tied to a basket of currencies.
The move pushed the yuan up 2.1% against the dollar. But Daily Reckoning contributor Eric Fry, an expert in emerging markets and international diversification, says it won’t stay there for long. “Currencies in motion tend to continue in motion, even when they are ‘managed,'” Fry says. “So I’d say the odds are pretty good that the yuan continues to strengthen over the months ahead.”
Fry predicts one of the biggest beneficiaries will be the commodities market. “Even with their undervalued currency, the Chinese had become voracious buyers of commodities. A strengthening currency, therefore, should help to boost their commodity consumption somewhat.”
He adds that the increased demand will only push prices higher. “If you liked resource stocks before today’s yuan revaluation, you’ve got to love them now.”