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U.S. Impact of Chinese Yuan Revaluation

U.S. Impact of Chinese Yuan Revaluation

The long awaited revaluation of the Yuan has arrived. After keeping its currency virtually fixed near 8.28 per Dollar since 1996, China said that it was adjusting the Yuan’s value to 8.11 per Dollar. In addition, China will abandon the Yuan’s peg to the Dollar and, instead, value it based upon a basket of currencies of their main trading partners.

Finally, China announced the Yuan will be allowed to float in a range of 0.3% from each prior day’s closing price.

The impact of this move sparked quick responses in the currency markets. Malaysia chose to abandon its Dollar peg. The Japanese Yen rose over 2% on speculation that much of Asia will see currencies rise as countries no longer fear giving China a competitive edge.

What will be the impact in the U.S. to China’s currency play? Here are some initial thoughts…

Companies that derive a significant amount of their profits from Asia will likely see profitability improve due to the benefit of translating foreign currencies into U.S. Dollars. However, companies that source a significant amount of their products (can anyone say Wal-Mart?) will see their costs rise. The result will be decreased profitability and lower stock prices unless Asian suppliers choose to absorb the cost increase to protect market share.

Companies that must contend with higher costs are likely to pass them on to consumers. Look for increased pricing at the retail level. As a result, The Fed may feel pressured to continue raising short-term rates.

Asian countries, major lenders to the U.S. given their huge trade surpluses, will have a smaller appetite for U.S. Treasury bonds. Look for the decreased demand to depress prices and push up yields.

Higher rates on the 10yr Treasury should result in higher mortgage rates which derive their pricing from action in the bond market.

Fervent speculation about a housing bubble will only be fueled by rising mortgage rates. Look for home prices to see slowing rates of increase, flat pricing or even decreases depending upon the froth inherent in the local markets.

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