billmon - Breaking the Peg

[realFedUp]

http://billmon.org/archives/002050.html#more

July 22, 2005
Breaking the Peg

snip-
More immediately, though, China's move puts pressure on other energing Asian countries to allow their currencies to rise against the dollar, which Malaysia did as soon as it heard the news from Beijing. Hong Kong, which is now an appendage of the mainland economy, soon will have no choice but to do likewise, although for now its still holding out.

As Asian currencies are freed to float, other Asian currenies, already floating, become freer to rise. Their central banks, too, will now have less reason to purchase dollar assets, adding to the pressure on U.S. bond yields (which, in the fullness of time, shoud also translate into higher mortgage rates. The housing bubble has been living on borrowed time, and now the first of those loans are coming due.)

Bond traders, knowing all this, have already started bidding bond prices lower and yields higher. The yield on the benchmark 10-year Treasury note rose from 4.18% to 4.28% yesterday -- a pretty sizable daily jump, although frankly not as much as I would have predicted.

That may be because the market had already gotten wind of the revaluation. Yields have moved up substantially over the past few weeks. Also, the London bombing caused a brief run back into Treasuries yesterday morning. Federal government securities are widely viewed as a safe haven in times of crisis. So we may see some more selling today or Monday.

The U.S. stock market also traded lower on the news, although not dramatically so. Asian stocks took the news much harder -- which only highlights the deflationary undertone to the global economy, high oil prices notwithstanding.

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