The currency market which has been warily keeping an eye on the satellite imagery of Rita in the Gulf of Mexico was momentarily rocked out of its storm watch slumber when the Bank of China announced that it was widening yuan's trading band against the euro, yen and the Hong Kong dollar. The yuan will be allowed to move as much as 3% against those currencies versus the prior limit of 1.5%. The move verticalized all of the majors but within 20 minutes the euro, pound and the franc returned to their pre-news levels and only the yen retained most of its gains.

The yen, of course is the primary beneficiary of any yuan appreciation for two reasons. First, China is Japan's biggest export market, so any increase in the yuan will generate larger profits for Japanese businesses through currency appreciation. Secondly Japan actively competes against China in global markets and any yuan strength will make Japanese products more attractive against their Chinese counterparts. The move comes on the eve of the G-7 summit meeting and is most likely intended to dissuade any protectionist policy moves against China.    

After the momentary flutter the market settled back to the nights ranges with dollar generally stronger against all currencies. Concerns about Rita abated somewhat when the Hurricane was downgraded to category 4 and appeared to be headed east of Houston. At this point  every FX trader has become an amateur meteorologist with satellite imagery sharing desktop space with price graphs. However, the true impact of Rita will not be known until landfall this Saturday and with no economic data from US on the calendar today, the market is unlikely to become to aggressive ahead of the weekend. One nasty possibility, projects Rita stalling in front of the Texas coast for several days, pelting the area with 80 mph winds and torrential rainstorms.  With German elections still unresolved, the market remains at a standstill as neither US nor Europe offer much of a reason to be long.

Boris Schlossberg is a Senior Currency Strategist at FXCM.