The oil market re-evaluates China’s re-valuation. Perhaps the yuan re-valuation was not as bullish as you thought. We warned yesterday not to get complacently bullish on the yuan re-valuation and sure enough after the commodities markets popped, they then dropped. In fact it is very possible that this yuan re-valuation non-event may change the short term trend direction risk in commodities. Mainly I am talking about gold and oil but other commodities that have speculated for months on the Chinese government allowing their currency to “float” may have already bought the rumor and sold the fact.
Besides, despite what you might think, this unclear valuation in this environment may not be as bullish for demand as some might think. Despite the increase in Chinese purchasing power the main driver of their economy is still exports. Higher yuan means fewer exports. And they have wage pressure at home and that has the Chinese government desperately trying to adjust their market by making workers more satisfied with the yuan they've got. Yet this move could drive inflation at home as Chinese consumers start to look for more goods and property perhaps leading to imbalances in the overall Chinese economy.
For oil the idea that this move would put pressure on the dollar and raise all petroleum prices was thwarted by how demand might respond to higher energy prices. Already demand for oil is struggling. We know consumers are price sensitive and we know that oil is sensitive to the dollar.
Phil Flynn is senior energy analyst for PFGBest Research and a Fox Business Network contributor. He can be reached at (800) 935-6487 or at pflynn@pfgbest.com
