Yuan Revaluation Benefits Corn, Soybeans

Published on: 08:19AM Jun 23, 2010
In a surprise announcement on June 19, China’s central bank announced it would remove the two-year-old peg to the U.S. dollar and to allow for a more flexible yuan, although it is not a free float and monetary authorities will keep the yuan in a tight trading band. The Chinese central bank also noted there will not be a dramatic revaluation, but rather a gradual adjustment.

The announcement of a stronger Chinese currency is excellent news for U.S. exports, especially the grain complex, as U.S. grains are now more attractive to Chinese buyers. Grain prices rallied intra-day, but gains were muted by a weaker Euro and stock market.

Long-term, we see the “flexible” currency as a big positive for grains. China will gradually appreciate the yuan against the dollar to temper inflation and to stabilize trade balances. China has an insatiable appetite for grains and we see this move by the central bank as a long-term strategy to feed the growing nation.

The last time China revaluated the yuan between 2005 and 2008, the currency appreciated 20% against the dollar. We expect the central bank will implement a similar appreciation over a similar time period as China looks to reduce its dependency on exports.

The decision comes after heavy pressure from the U.S. and other member of the G-20 leading up to the G-20 summit in Toronto this weekend. The U.S. argued the yuan was undervalued, giving Chinese exporters an unfair pricing advantage and deterring the global recovery.

The aggressive stance to appreciate the yuan by the U.S. probably delayed the revaluation decision by the Chinese. The Chinese do not want to be pressured by Western powers, and would have probably made the decision much earlier if they didn’t receive so much political pressure.

This is also a sign of positive strength for the Chinese economy and it is well positioned. The move reduces the risk of inflation and the need to raise interest rates to slow the growth of the Chinese economy.

Overall, the Chinese willingness to have a “flexible” currency will benefit grain prices over the long-term and allow Asian buyers to have access to cheaper U.S. grain exports.

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