WINDERMERE, Fla. (Stockpickr) -- Big news hit the market over the weekend after China's central bank announced plans to gradually float its currency more freely against the dollar and other major currencies. On Monday, the yuan jumped to an exchange rate of around 6.8 to the dollar, or 0.38% higher, vs. its fixed peg rate of 6.83. The sharp rise marked the biggest gain for the yuan since it registered a 2.1% gain on July 21, 2005.
Chinese leaders did not provide many details, including by when, or by how much, the currency would be revalued, but they did rule out a one-time revaluation like they did in 2005. "The global economy is gradually recovering and the upturn in the Chinese economy has become more solid," the central bank said in a statement. By dropping the currency peg, China is also making an effort to fight off inflationary pressures that are mounting from the bubble in its domestic property market.
Stock markets around the world took off on the news but quickly gave back much of their gains as market players realized the effects on the global economy would take a long time to show any measureable results. Traders have been crying foul for a long time as communist China refused to allow free markets to rein over its currency.
The news was cheered by many world leaders, including President Barack Obama, who said the move was a "constructive step that can help safeguard the recovery and contribute to a more balanced global economy." The issue of China floating its currency has always been a sore spot among foreign manufacturers and exporters whose goods sold in China were more expensive, while China's domestic manufacturers benefited greatly with much cheaper exports.
Of course, American consumers never complained because a controlled currency led to cheap Chinese-made clothes, toys and electronics -- all of which can be found on the shelves of your favorite U.S.-based retailers such as
. But if Beijing isn't bluffing, the days of cheap Chinese goods could now be numbered. Reason being, U.S.-based retailers will have a tough time keeping prices low while maintaining profit margins if a revaluation of the yuan increases product prices.
The move by China was most likely politically motivated, coming just one week before world leaders are set to descend on Toronto for the G-20 economic summit. Chinese officials probably wanted to sidestep any media criticism since the yuan's value ranked high on the agenda at the G-20 meeting.
Here's a look at some of the
that could benefit off the yuan/dollar decoupling.
If China is really serious this time about a longer-term revaluation of its currency, then how should you play it?
Investors should put the
WiscomTree Dreyfus Chinese Yuan
on their radar for a pure play on Beijing's plan to float its currency. The ETF is an open-end management fund that has direct exposure to the movements in the Chinese yuan relative to the dollar. The WisdomTree Dreyfus Chinese Yuan Fund is already experiencing bullish trends, with $350 million in cash inflows thrown its way in the first five months of 2010.
Although I doubt this ETF will move much in the near term due to China's secretive ways, it should be a great long-term winner if Beijing is really serious about decoupling its currency. From a technical standpoint, a move above the 200-day moving average of $25.21 and the all-time high of $26.50 would confirm the bulls have taken control of this ETF.
A revaluation of the yuan should also be bad news for the recently hot dollar. In fact, if you go back and study the markets between 2005 and 2008, the last time China floated its currency, the dollar index plunged from 85 to 70. If this trend shows up again, market players are going to want to have exposure to the
PowerShares DB U.S. Dollar Index Bearish
, an ETF that establishes short positions in futures contracts that track the Deutsche Bank Short U.S. Dollar Index. Investors should look to take advantage of China's slow and methodical revaluation policy. This will give you plenty of time to put on a position if you think the trend is setting up for a lower dollar. Another great thing about this ETF is that it's trading near some solid longer-term support around $24 a share.
Another asset class that could be a big winner is commodities since a stronger yuan will raise the buying power for China. China has insatiable appetite for commodities, with the country now accounting for 30% to 60% of the world's total demand for most industrial commodities.
A solid way to capitalize off this potential trend is through buying multinational commodity stocks that have exposure to more than one commodity. Put names such as
Freeport-McMoRan Copper & Gold
on your radar.
Investors might want to consider going long the
CurrencyShares Australian Dollar Trust
, which is an ETF that's focused providing returns similar to those of holding the Australian dollar. The reason this play would be a big winner off of an advance in the yuan is because commodity exports make up a whopping 64% of all of Australia's total exports.
Also take a look at Brazilian-based commodity ADRs such as oil and gas producer
, metals and mining company
and steel producer
Companhia Siderurgica Nacional
. China is now Brazil's largest trading partner, after it took over that top spot from the U.S. last year. It's worth noting that billionaire
recently upped his stake in Petroleo Brasileiro by 17% to 6% of his portfolio. Even more important, Soros has about 30% of his long investments in the oil and gas complex.
A higher yuan will also create a local wealth effect for Chinese consumers. This could benefit U.S.-based multinationals with large exposure to China's economy, such as
Advanced Micro Devices
at 45% exposure,
at 39% exposure and
at 34% exposure. Nvidia and AMD will benefit as Chinese consumers look to satisfy their appetite for high-end computers and gaming systems, since both firms sell chips that power everything from high-end desktop and notebook PCs to video game consoles.
To see more yuan revaluation stock picks, including
Cliffs Natural Resources
, check out the
portfolio on Stockpickr.
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