How China's Currency Move Changes the Investing Landscape

Keith Fitz-Gerald

The markets got carried out feet first on Wednesday in early trading that saw the Dow plunge more than 230 points, the S&P 500 shed more than 25 points, and the Nasdaq crater a massive 90 points.
Then, as logic and common sense prevailed, the major averages fought their way back in one of the most gut-wrenching days in a long time.
There were a lot of jangled nerves out there, and China was being pilloried for its actions.
But I’m convinced China's currency move was absolutely brilliant for two reasons:

• China's doing Yellen's job for her; and,
• China's creating a fresh round of profits for savvy investors.

Let's begin by talking about what Beijing did and why I believe this is a major move that changes the investing landscape.

This is the biggest currency adjustment Beijing's made in 20 years, and it's the biggest single drop since 1994 when China ended the old dual currency system.

On the surface, the 1.9% decrease in that nation's central bank "reference rate" is designed to support exporters and boost market pricing in China. Western analysts view it as a threat because it's clearly more "price fixing" on China's behalf.

What they don't understand is that China's been propping up the yuan for years to guard against capital outflows, to protect foreign currency borrowers, and to stabilize the yuan's role in international trade as a potential reserve currency for the International Monetary Fund. If you think China's got too much power now, imagine what the world would have looked like today if that nation had not restrained its currency.

Dropping the yuan is actually a means of making room for market-based pricing.

I've long counseled that Washington had better be careful what it wished for when they accused China of currency manipulation, specifically because of the kind of reaction that's happening today.

Contrary to what Washington would have you believe about China's currency being undervalued, the yuan's real effective exchange rate has risen by 33% over the past four quarters, according to the Bank of International Settlements. In fact, the growth was so high and so fast that it was the single fastest appreciation move and the highest among 32 major global currencies tracked as reported by Bloomberg.

Dropping the yuan is not only logical, but part of the path China has to take to make its currency fully convertible.

Join the conversation. Click here to jump to comments…

Keith Fitz-Gerald

About the Author

Browse Keith's articles | View Keith's research services

Keith Fitz-Gerald has been the Chief Investment Strategist for the Money Morning team since 2007. He's a seasoned market analyst with decades of experience, and a highly accurate track record. Keith regularly travels the world in search of investment opportunities others don't yet see or understand. In addition to heading The Money Map Report, Keith runs High Velocity Profits, which aims to get in, target gains, and get out clean, and he's also the founding editor of Straight Line Profits, a service devoted to revealing the "dark side" of Wall Street... In his weekly Total Wealth, Keith has broken down his 30-plus years of success into three parts: Trends, Risk Assessment, and Tactics – meaning the exact techniques for making money. Sign up is free at totalwealthresearch.com.

… Read full bio