Currency

Investors are fleeing Russian and Georgian assets due to the recent crisis. Russian foreign exchange reserves fell $16.4 billion in the past week, the largest decrease since the 1998 ruble crisis. Yields on ruble bonds rose 75 to 150 basis points and the business community complained about lack of access to credit. One Russian columnist wrote, "The million-headed hydra of the bourgeoisie has sent a signal: ‘change your course comrades!"

Snapshot asks, did the Russian business community yank the reins of the Russian military?

Newsweek - The Bulls Have Left Moscow
Financial Times - Investors quit Russia after Georgia war
Moscow Times - Reserves Plummet $16.4Bln in a Week
Reuters India - Emerging Markets-Russia, Georgia assets extends losses

Falling currencies and rising prices for food and fuel are raising inflationary pressures to dangerous levels across Asia. Annualized inflation reached 4.9% in South Korea and over 11% in India. As domestic pressure mounts from consumers and labor unions, Asian central banks are reversing long standing policies designed to maintain weak currencies and benefit exports, and are instead actively intervening to push up currency values and lessen the blow from rising import costs.

The only nation not caught up in this wave is China. While consumer inflation reached its highest levels in a decade, the government has stifled domestic discontent and the trade surplus has held steady despite rising import costs.

Snapshot asks, will rising commodity and fuel prices force a greater Chinese response?

For the first part of 2008, the Chinese have increased the pace of yuan revaluation, but in doing so they may have augmented inflation, the very problem they are trying to prevent. Speculators poured funds into China (some believe as much as $200bn) during the first quarter of 2008 on the assumption that the undervalued yuan will appreciate further. The increased pace of appreciation during the first quarter only gave speculators more incentive to sneak cash in China's back door. The resulting growth in the monetary base has contributed to Chinese inflation. As a policy response some have argued China should do a one-off revaluation of the currency anywhere from fifteen to forty percent. Unsurprisingly, the Chinese authorities have not taken this risk.

Snapshot asks, what will be the pace of future yuan revaluation and will it stoke or reduce inflationary pressure?