Dubai Roils the Forex Market

Last updated 11/27/2009 9:39 AM ET (GMT -5) 3 Comments

Kathy Lien

Director of Currency Research, GFT

What was supposed to be a quiet holiday with most U.S. traders off their desks, certainly wasn't. Stock markets around the world are down sharply along with all high yield currencies such as the EUR, GBP, AUD and NZD. Only the lowest yielding currencies - the JPY and the CHF managed to outperform the dollar. The overriding fear is that this would turn into an Argentina style debt default or a repeat of volatility of Q4 2008. A major exogenous risk like the Dubai news is one of the few things that can trigger a bottom in the U.S. dollar as the greenback's safe haven status overrides U.S. fundamentals. Whenever there is a situation where traders are unsure about how the political or economic environment will pan out, such as Dubai's woes, they always sell first and ask questions later. The USD and JPY are the biggest beneficiaries of this selling.

Details on Dubai

On the eve of November 25th, the Thanksgiving Holiday in the U.S. and the Eid Holiday in the Middle East, Dubai World shocked the markets by saying that its property developer Nakheel has requested to delay its Dec 14 debt payments. Dubai World is not technically owned by the Dubai government, but with liabilities of US$59 billion, it is a significant amount of the total estimated US$80-100 billion in Dubai's liabilities. As a result, investors fear that this could mean an outright default on Nakheel's debt as delinquency is the first step to default. Although the market has clearly not taken this news well and believes that it is a major development for the global economy, it is important to realize that Nakheel's debt is only $3.52 billion, a fraction of Dubai World's overall debt. Granted a default may entitle investors to some of Dubai World's assets, H.H Sheikh Ahmed bin Saeed Al-Maktoum, Chairman of the Supreme Fiscal Committee, has already issued a statement confirming the Dubai Government's intention to directly intervene and manage the restructuring of Dubai World commercial operations and its debt obligations. What is more worrisome is the fact that this may be indicative of the health of the entire property sector in the Middle East.

Verbal intervention from Japan

Aside from risk aversion, one of the primary reasons why the JPY performed so strongly and broke 85 intraday is because Japanese officials are out in force talking down the currency. Overnight, Japanese Finance Minister Fujii said he is very nervous about current forex moves and there is no doubt that the moves are one-sided. Although he refuses to comment on intervention, he warns the market to make "no mistake that the damage from excessive yen gains will be big for Japan." Fujii's warning was joined by government spokesman Hirano, Strategy Minister Kan and Vice Minister for the economy Furukawa. The cohesiveness of the comments from Japanese officials significantly heightens the risk of physical intervention.

Looking ahead, it will be a volatile trading day in the U.S. The Dow opened down 2 percent. The currency market has already absorbed the news and is bouncing as we speak but it remains to be seen whether this move can be sustained.

Comments (3)

hsbc

November 27, 2009 at 10:50 AM ET

completely overdone. sell usd rally, buy gold, buy aud

youngbeast777

November 27, 2009 at 08:25 PM ET

huge head fake, dubai problem was masterminded to have shorts put more money into their positions...oil is going to jump since it's oversold...Dubai problem temporarily fixed..monday markets will jump, USD will plunge, NZD/USD will sky rocket!

alexjbrandt

November 28, 2009 at 06:32 AM ET

This is a perfect opportunity to buy the higher yielding currencies on this dip. I've already put in my long positions on the EUR/USD, USD/AUD, USD/NZD and short on the USD/CHF, USD/CAD. However, I was surprised that AUD/USD broke its 9 month trend support.

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About The Author

Kathy Lien began her FX trading career 10 years ago at J.P. Morgan Chase. After graduating New York University’s Leonard Stern School of Business at the age of 18, Kathy joined the bank's interbank FX trading desk and eventually moved to the cross markets proprietary trading desk. In the interbank market, her ability to create solid fundamental and technical analysis from the myriad of information on the market helped her trade forex spot and options. Her experience eventually led her to be chief strategist at Daily FX where she worked until she joined GFT in 2008.

With her knowledge of forex, as well as her experience trading other products, such as interest rate derivates, bonds, equities, and futures, Lien has built a reputation as an international currency analyst. She is frequently quoted on CNBC, Bloomberg, Fox Business and Reuters. Lien has also written for publications like Active Trader, Futures, and SFO magazine. She is the author of the newly updated Day Trading the Currency Market: Technical and Fundamental Strategies to Profit from Market Moves, and the co-author of Millionaire Traders: How Everyday People Are Beating Wall Street at Its Own Game with Boris Schlossberg.

To buy Kathy’s newly updated Day Trading and Swing Trading the Currency Market: Technical and Fundamental Strategies to Profit from Market Moves, click here.