Currency Story Continued

From Reuters:

MORE TO COME?
The Singapore dollar, widely used with the yen to bet on a yuan move, shot higher to a two-month high of 1.6503 per U.S. dollar, up 2 percent on the day compared with 1.6843 on Wednesday, before dealers reported the intervention.
Singapore said it will maintain its policy of gradual and modest strengthening of the Singapre dollar and said fundamentals of the city-state's economy had not changed.
Hong Kong said it would not consider changing its currency peg to the dollar even if the yuan keep appreciating and said the Hong Kong dollar will remain very stable.
The Indian rupee rose to a six-year peak against the dollar around 43.20, up more than half a percent.
"The move is clearly positive for Asian currencies first, and to some extent the euro. It is pretty clear that the basket will involve a reasonable chunk of Asian currencies," said Emanuele Ravano, European strategist at PIMCO in London.
The Korean won's non-deliverable forward prices, used by offshore investors to trade the won, showed investors are factoring in a 2.2 percent rise in the won/dollar rate in one-month's time.
...

Following the yen's rise of more than two percent, Japan's top financial diplomat Hiroshi Watanabe said he is watching the market carefully and would take action if needed.
Japan has been urging China to reform the rigid FX regime but it had repeatedly said the yuan revaluation doesn't mean a higher yen and it has hinted it would intervene if necessar

Update 2:51 PM: This quote from Nouriel Roubini sums up what I am watching for:

And this could really be the beginning of the end of the Bretton Woods 2 regime of fixed pegs to the U.S. dollar in Asia. Malaysia already decided today to drop its peg relative to the U.S. dollar. This China move may also force Hong Kong to phase out its long term currency board and U.S. dollar peg. And other Asian currencies will soon sharply appreciate, following the yen's lead today. Even currencies at the periphery of this Bretton Woods regime (such as those in Latin America) may sharply appreciate. The systemic consequences of this currency realignment throughout Asia and the world could be radical and have significant impacts on U.S. long-term interest rates, on U.S. financial markets and on the U.S housing bubble.

Asian Currency Revaluations

China and Malaysia both moved their currency pegs last night. The move in the Renminbi was 2% which is smaller than the 5-10% most analysts had been mentioning but the impact could be quite large if other countries follow suit.

From the FT:

The effect of China’s move was expected to spread to other Asian currencies as other countries in the region were set to decouple their currencies from similar pegs to the dollar to make them more competitive.
Shortly after China’s announcement, Malaysia said it would alter its peg and allow the ringgit to fluctuate freely and Singapore, whose currency is tied to a trade-weighted basket of currencies, was also due to make an announcement.

Makes me wonder if the story won't continue to unravel for the next couple of weeks as other government reaffirm or change policy. That is a different story than the smaller than expected Chinese move in the headlines and it is what I will be watching for.

Snow Knows when China will Revalue

From the FT:

The Bush administration has told key senators that it expects China to revalue its currency in August ahead of a planned visit to Washington by President Hu Jintao in September, according to people familiar with the matter.
Senators Charles Schumer and Lindsey Graham, co-sponsors of a bill that would impose a 27.5 per cent tariff on Chinese imports, agreed to delay a vote on their bill after receiving what they regarded as an assurance that China will move on its currency next month.
In a June meeting attended by Alan Greenspan, Federal Reserve chairman, John Snow, Treasury secretary, told the senators that he believed China would allow the value of the renminbi to increase against the dollar in August, the people familiar with the discussion said.

Though I agree with the timing I am surprised they would tell Snow and surprised it would leak. The yen is trading 112.15 so I guess the market is yawning it off. Not sure that will continue.

The dollar seems like it is in a prime spot for a reversal (DXY is sitting below some long-term resistance in the 90-92 range). Also this fits with the current interest rate environment as the Fed has primed traders for more rate hikes while the yield curve threatens to invert. Seems like a bit of a disconnect between the carry traders in currencies and the "conundrumless" bond market.

London Bombings and the Markets

I don't think the markets have ever seen a 15 pt gap in the S&P index with an 11 handle on the VIX. That will probably lead to a gap in volatility prices when option markets open. The heads on CNBC are reminding people of the fast recovery the markets had after 9/11 and the Madrid bombings but the 11 VIX makes today completely different. There is a much higher risk that the vol increases from such a low level will lead to a very deep and sharp pullback that accelerates over the next few days.