China, Japan and the US

US President Obama is scheduled to meet Chinese Premier Wen tomorrow on the sidelines of the UN meeting. Reports also suggest a bilateral meeting with Japanese Prime Minister Kan may take place.

Even though the meetings will be separate, the heads of state of the three largest economies in the world will meet. There is much focus on the yuan and some have suggested that BOJ intervention last week was aimed just as much at the yuan-yen rate as the dollar-yen rate. China is Japan's largest export market. The intervention appeared to be a little less than the amount of Chinese purchases of Japanese bonds this year.

Before the week is up, the US House and Ways Committee is expected to vote on the Chinese trade bill and it could go to the entire House next week. For the bill to become a law, it needs to have the approval of the Senate and Obama would have to sign off. These last two steps are considerably less certain the the House committee or even the entire House. The Senate tends to be more deliberative and often less protectionist.

Meanwhile, the Obama Administration has been warning Congress against passing legislation that is illegal under the WTO agreements. There is a subtle threat that he would veto such a bill.

Chinese Premier Wen has not come alone. The delegation he is heading up is going on a shopping spree in the US and business deals of several billion dollars are expected to be announced in the coming days. This is part of China's modus operandi. It is also not surprising that pace of yuan gains has accelerated over the past couple of weeks. Premier Wen has likely been briefed that the US feels a bit betrayed by the lack of yuan movement after the June announcement that the yuan would be more flexible.

Earlier this week Chinese officials had essentially told the US not to get involved with the regional territorial disputes. But this is a wedge issue in emerging Asia as China has territorial disputes with several countries and the Japanese dispute is simply the highest profile now. Several other ASEAN countries, including Indonesia for example, have rejected China's stance and appear to be embracing the US as a counter-weight to the PRC. This dovetails nicely with the effort by the Obama Administration to re-engage ASEAN countries.

The US seeks Chinese cooperation on a range of issues. Currency and trade may be the key economic issues, but there are a number of security issues, like North Korea and Iran that may be easier to address if the two largest economies in the world cooperated.

The market is testing the BOJ's resolve by taking the dollar to its lowest level since last week's intervention. It is now nearly 2 big figures off the post-intervention high. Japanese markets are closed tomorrow and although passive intervention (leaving some stop orders) is possible, it seems unlikely. Moreover, the price action in the fx market suggests this is a dollar move not a yen move, further reducing the odds of a successful operation.