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Dollar Decoupling From Risk?

Last updated 12/14/2009 5:20 AM ET (GMT -5) 0 Comments - Add your comment

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Boris Schlossberg

Director of Currency Research, GFT

Top Stories

• Abu Dhabi provides $10 Billion to Dubai World
• Tankan - better than forecats at -24 vs. -26
• Nikkei flat but Europe gains on Dubai news
• OIl below $70/bbl at $69.23 last
• Gold quiet at $1123/oz.

Overnight Eco

• JPY Tankan Manufacturing Index -24 vs. -26 forecast
• JPY Tankan Non-Manufacturing Index -22 vs. -23
• GBP Rightmove HPI -2.2% vs. -1.6%
• CHF PPI 0.0% vs, 0.2%
• EUR Industrial Production -0.6% vs. -0.6%
• EUR Employment Change -0.5%

Event Risk on Tap

• CAD Capacity Utilization Rate expected at 68.2%

Price Action

• USD/JPY hovers near 89.00 post Dubai after selling off to 88.40 on better Tankan news
• AUD/USD risk flows lift it above 91.00
• GBP/USD spikes to 1.6300 post Dubai but sells of on EUR/GBP flows to 1.6250
• EUR/USD can't take out 1.4700 despite Dubai rescue news

A firmer bid for risk at the start of the trading week after Abu Dhabi came to the rescue of Dubai World by putting together a  $10 billion package that will allow Dubai to meet its obligations on its property unit Nakheel. The threat of Dubai world bankruptcy triggered a major wave of risk aversion over the Thanksgiving week-end as investors worried that the problems with Nakheel bonds could set off a domino effect of defaults in the region. The Dubai government faced massive pressure from international investors in the wake of the crisis, to guarantee the Nakheel paper and today’s rescue should ease some of those concerns for the time being.

However as we noted earlier, “This is the second time since the start of the credit crisis that Adu Dhabi has served as a source of liquidity for Dubai, but despite the fact the emirate runs one of the largest sovereign wealth funds in the world, it alone cannot continue to pay for Dubai financial obligations indefinitely and the final impact of this saga will likely result in a much more tempered pace of growth in UAE going forward.”

Meanwhile in Asia the Tankan report printed better than expected with the Manufacturing Index coming in at -24 versus -25 forecast and the non manufacturing data registering a reading of -22 versus -23 projected. Some market participants expressed concern over the weak capex spending  which showed a -13.8% drop versus forecasts of -11.30%  but others pointed to an a slowly improving  labor picture and a nascent recovery in corporate profits which should provide some foundation for growth in 2010.  

After catapulting past 90.00 in post NFP trade two weeks ago USD/JPY has slowly sold off  since then and for now  that level appears to be key resistance  for the pair. The trade in USD/JPY& nbsp; continues to be driven by credit rather than equity markets as interest rate expectations in G-3’s two lowest yielding currencies have become the primary catalyst for direction. The key theme in USD/JPY for currency traders going forward has now moved away from pure risk aversion/risk assumption flows to a more  balanced view of which economy will have faster growth in 2010 resulting in steepening of the sovereign debt curve.     

Finally with no event risk on the North American calendar today, the only other data point of note was the decline in EZ Industrial Production numbers which slipped, as expected, to -0.6% from 0.3% the period prior. The dollar is clearly starting to decouple  from the risk trade as positive US data is finally translating into a better bid tone not only for equities but for the greenback  as well.  Meanwhile, the euro now faces questions regarding the fiscal problems of its member nations with Greece today expected to put forth a proposal on how it will tackle its budget crisis. If Greek Prime Minister George Papandreou, who is scheduled to speak at 17:00 GMT later today, offers no concrete measures for curtailing the deficit the eurp could head towards 1.4600 once again.

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About The Author

Boris Schlossberg began his Wall Street trading career more than 20 years ago at Drexel Burhnam Lambert. There, he traded nearly every type of financial product on the market in the U.S., from equities and options to stock index futures and foreign exchange. His innate ability to analyze market information and use it to trade has helped him become an industry-recognized, “go to” trading professional.

These days, whenever the markets move, many organizations turn to Schlossberg for his take on the situation. He is a weekly contributor to CNBC's Squawk Box and a regular commentator for Bloomberg radio and television. His daily currency research is widely quoted by Reuters, Dow Jones and Agence France Presse newswires and appears in numerous newspapers worldwide. Schlossberg has written for publications like SFO magazine, Active Trader and Technical Analysis of Stocks and Commodities. He is also the author of Technical Analysis of the Currency Market and the co-author of Millionaire Traders: How Everyday People Are Beating Wall Street at Its Own Game with Kathy Lien. He joined GFT in 2008.