Dubai Debacle drives Dollar Higher

While giving thanks yesterday, North American consumers watched world equity indices plunge into a ‘sea of red’ as Dubai World’s demand to restructure their debt repayments shook global investor confidence. This morning the rest of North American markets will be playing catch up. Dubai is the emerging markets showpiece. It has been the recipient of a huge global liquidity boom and now is on the cusp of defaulting! Is this the start of something contagious that will spread virally throughout the emerging and global markets? No matter, consumer confidence is rattled, and it makes sense why USD debt auctions have been well received near record low yields.

The US$ is stronger in the O/N trading session. Currently it is higher against 15 of the 16 most actively traded currencies in another ‘whippy and illiquid’ trading range.

The million dollar question is of course will Dubai World’s impending collapse be the impetus to push global equities over the edge? Or will the investor be able to isolate this as just another ‘storm in a tea cup’? Berating the ‘overvalued’ equities lower will lead us down the path towards global protectionism. This will only push the ‘reserve currency’ higher and question the sustainability of the lemming ‘carry-trade strategy’ that has earned various investors close to 20% this year. In reality we are experiencing the unexpected, analysts and dealers are now trying to gage the spill-over effect into other markets, who is owed what, how the knock on effect will affect creditors. British banks are reportedly the largest lender to the region and most of them are on their knees! Crowded trades will be pared back aggressively as we head into the most illiquid of trading times. We have witnessed that this morning with gold plummeting over $30. Dollar bulls will lead the way, but do not mention the un-winding of carry trades, the market cannot handle that just yet!

The USD$ is currently higher against the EUR -0.97%, GBP -0.98%, CHF -1.07% and JPY +0.34%. The commodity currencies are weaker this morning, CAD -1.06% and AUD -1.74%. The loonie is threatening to burst out of it tight trading range as commodity prices collapse on the back of weaker global equities. Earlier this week the CBR (Russia) indicated that they would be adding the CAD to their required reserves and by default liquidating some of the USD exposure supported the currency, but after the Dubai debacle, that is but a distant memory. In theory, the Russian Cbank wants to increase its ‘gold holdings and promote regional currencies in trade and finance to reduce risks posed by the US dollar’s dominance’. Rumors of other Cbanks like India again expressing their willingness to add more gold will eventually provide a bid to growth currencies. However, in this market it’s not the time for it! Dubai World’s desire to re-negotiate their debt payment schedules has pushed risk aversion trading strategies to the fore. The 3c trading range is in danger of being breached. Lack of liquidity, but no lack of direction has caused currency markets to be rather volatile. Dealers and investors can assume more of the same today in this holiday shortened week.

The AUD had its largest loss in over a month in last night’s session, as investors gravitated towards the JPY as Dubai World shakes investor confidence as its proposes to delay debt payments risking triggering the biggest sovereign default ever. Risk aversion trading strategies are dominating the currency market at the moment. Earlier this month, the RBA minutes implied that three straight lending rate increases may not be on the cards had futures traders unwinding some of their bets that Governor Stevens would tighten monetary policy again in two-weeks. He said that the pace of further rate increases ‘remained an open question’. With commodity prices temporarily in trouble, dealers are looking to sell AUD on upticks (0.9012).

Crude is lower in the O/N session ($74.00 down -396c). Finally, someone is taking fundamental crude data into consideration when they are pricing the black-stuff. Oil managed to pare this week’s entire advance. Elevated prices are not supported by the EIA report which showed that inventories managed to advance to a new 4-week high. Demand destruction is alive and kicking, coupled with the Dollar Index advancing on investor risk aversion, crude is on course again to test new lows. Last week’s EIA report met with analysts expectations. Crude stocks rose less than expected as imports gained. Inventories advanced by +1m barrels to +337.8m vs. market expectation of a +1.2m gain. On the face of it, the build up was consistent with Tuesday’s API report, where inventories advanced +3.3m barrels as imports also rose. Analysts said that daily imports added +371k barrels a day as imports and the Gulf of Mexico output rebounded from the disruptions caused by ‘Ida’. Gas inventories advanced +1m barrels to +210.1m, w/w, vs. market expectations of only +300k. Distillates stocks (those that include heating oil and diesel) declined by -500k vs. expectations of -100k. Refinery utilization managed to advance +0.9% to 80.3% of capacity, vs. analyst forecasts of only +0.3%. Repeatedly over the last few weeks the $80 handle remains a stubborn resistance point, again the market attempted and again it has failed. However, demand destruction does not warrant elevated prices, perhaps the $80 a barrels will be the top for the remainder of this year.

There is nothing like a bullish rumor to add spice to the record price saga that the ‘yellow metal’ has been experiencing. It’s no surprise to witness gold jump to new record highs this week on rumors that India may want to add, once again, bullion to their reserves. Year-to-data, the yellow metal has gained +36% as investors and central banks increased their holdings of the commodity to preserve wealth. Also last week, Sri Lanka and Mauritius publicly added the yellow metal to their reserves. However, this morning during the London session the yellow metal has managed to grind out it largest loss in nearly a year as the gain in the dollar has damped demand for the precious metal as an alternative asset. This morning the commodity is testing strong support levels ($1,157).

The Nikkei closed at 9,081 down -301. The DAX index in Europe was at 5,609 down -5; the FTSE (UK) currently is 5,179 down -15. The early call for the open of key US indices is lower. The US 10-year bond eased 8bp yesterday (3.19%) and are little changed in the O/N session. This week’s $118b debt auctions were again well received, despite being issued near new record lows. All three auctions surpassed market expectation of demand as indirect bidders, usually Cbanks, took close to 60% of the entire product. The market remains better bid on Dubai World’s threat of potential default to its creditors. Emerging market stumbling has sent shock waves through all asset classes as investors seek surety of fund investments. Finally, the ‘seasonal’s’ are calling for a flattening rally ahead of ‘month end index extension’ next week. It’s too painful to be the contrarian in this environment!

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