Chinese Could Alter Entire Forex Market in Next Few Weeks

The People's Bank of China could increase the band the yuan trades in within the next few weeks, according to Bloomberg. That would allow the Chinese currency to float more freely, and perhaps appreciate against the U.S. dollar. Last week, the Chinese signaled their plan to allow the currency to become convertible within the next five years. Allowing the yuan to float freely might be bullish for the currency, as many economic commentators have argued for years that the Chinese are keeping their currency artificially undervalued in an effort to boost Chinese exports. Five years, however, is a long trading timeline. A few weeks is not. Chinese authorities may be coming under pressure as rampant inflation has begun to ravage the domestic Chinese market. Food inflation in particular has hurt the average consumer in China. If the Chinese allow the yuan to float more freely, and the yuan therefore appreciates, that might stem inflation within the country. A stronger yuan would have greater purchasing power, which might decrease the prices Chinese consumers are paying for goods. Action Items Bullish: Traders who believe that China will allow the yuan to float, and it will therefore appreciate, might want to consider the following trades:

• WisdomTree Dreyfus Chinese Yuan Fund CYB is a long yuan play. CYB attempts to return a value corresponding to the strength of the yuan and may rally if the yuan appreciates.
• Teucrium Corn Fund CORN is long play on U.S. exports. If the yuan appreciates, the dollar may depreciate. That might make U.S. exports attractive. Corn is a major U.S. export.

Bearish: Traders who believe that China will act slowly or may limit yuan convertibility may consider taking positions in the following:

• Wal-Mart Stores WMT is a weak yuan play. Wal-Mart imports a significant amount of their goods from China, if those goods remain cheap, Wal-Mart could do well.
• PowerShares US Dollar Bullish Index UUP is a long dollar play. If the yuan remains weak, the U.S. dollar might stay relatively strong.

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