U.S. Dollar: Intraday Reversals Question Magnitude of Dubai Woes

Last updated 11/27/2009 5:30 PM ET (GMT -5) 1 Comments

Kathy Lien

Director of Currency Research, GFT

THE STORIES IN THE CURRENCY MARKET

• U.S. DOLLAR: INTRADAY REVERSALS QUESTION MAGNITUDE OF DUBAI WOES
• JPY: WATCH OUT FOR INTERVENTION
• EUR: MAJOR INTRADAY REVERSAL
• CAD: CURRENT ACCOUNT DEFICIT HITS RECORD HIGH
• NZD: TRADE BALANCE NARROWS
• AUD: GOLD AND OIL PRICES FALL
• GBP: GDP REVISION FALLS SHORT

EXPECTATIONS FOR UPCOMING FED MEETINGS

U.S. DOLLAR: INTRADAY REVERSALS QUESTION MAGNITUDE OF DUBAI WOES

News that a property development arm of Dubai World requested to delay its payments triggered sharp volatility across the financial markets. The story actually broke on the eve of November 25 ^th and on the 26 ^th , currency traders began to flock into the safety of U.S. dollars. The demand for dollars was so strong that the euro hit an intraday low of 1.4829 when the European markets opened. The price action in USD/JPY tells us that risk aversion was the primary driver of the forex markets as USD/JPY fell to a 14 year low when the Asian markets opened last night. However the selling did not continue into the U.S. trading session. The limited number of U.S. traders at work today sold rather than bought dollars which suggests that not everyone believes that the Dubai news will have global ramifications. Whether this is true or not remains to be seen but 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. As a result, the USD and JPY were the biggest beneficiaries.

Understanding Dubai’s Problems

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. 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 usually the precursor 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. Also, U.S. and European banks have very small exposure to Nakheel’s 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. Although some people are afraid that this could turn into an Argentina style debt default or a repeat of volatility of Q4 2008, what is more worrisome is the fact that this may be indicative of the health of the entire property sector in the Middle East.

All Eyes on Black Friday Results

Across the pond, it is Black Friday in the U.S., which is make it or break it day for many U.S. retailers. It is their chance to turn a profit and gage the strength of the entire holiday shopping season. As usual, consumers have lined up at the big retailers as early as midnight to take advantage of special offers. According to surveys on the street, most consumers expect to spend less this year compared to prior years. However more people are expected to take advantage of Black Friday deals. The tally on how well the retailers did will probably begin to come in over the weekend and it will receive more coverage on Monday. If retailers do not perform well this holiday shopping season, we could see a new round of layoffs.

Unique Trading Pattern in EUR/USD Post Thanksgiving

Finally, we thought it would be interesting to see if there are any unique trading patterns in the U.S. dollar the week after Thanksgiving. As a result, we found that the EUR/USD appreciated 8 out of the last 10 years during that week. Normally this would suggest to us that we could see a similar trading pattern next week but with the Dubai news brings an exogenous risk to the market that may alter the seasonal pattern of the currency pair. As for economic data, we have an extremely busy trading week. The marquee release will be the U.S. non-farm payrolls report but Chicago PMI, manufacturing and service sector ISM, pending home sales and factory orders are also due for release.

JPY: WATCH OUT FOR INTERVENTION

Risk aversion in the forex market drove the Japanese Yen to a 14 year high against the U.S. dollar intraday. However the aggressive snapback in USD/JPY in the minutes after the currency pair broke Thursday’s low is reflective of the market’s fear about intervention. Last night, Japanese officials were out in force talking down the currency - 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 especially after Kan said “we have been in touch with the BoJ and will act as one to deal with the current situation.” If the Bank of Japan intervenes on behalf of the Ministry of Finance it would be the first for the new Democratic Party and could send a message to the market about their overall willingness to intervene in the market. It would also signal that 85, is the line in the sand for the new government. Meanwhile Japan released a barrage of economic data last night and most of the reports support the rally in the Yen. For example, the jobless rate fell from 5.3 to 5.1 percent, household spending surged 1.6 percent while consumer prices fell at a slower pace. The only Yen negative news was retail sales which fell in October but that was offset by the hotter household spending report. Although the Japanese economic calendar is light next week with the only major releases being industrial production, labor cash earnings and housing starts, the Yen will be in focus as traders remain on alert for any signs of intervention.

EUR: MAJOR INTRADAY REVERSAL

The relatively insignificant 0.24 percent drop in the EUR/USD today masks a tremendous amount of intraday volatility. At one point, the EUR/USD was down more than 200 pips which indicate that there was a strong reversal. Although dollars were bought aggressively throughout the Asian and European trading session, the correction in the U.S. session suggests that the overall trend for the dollar is still down. Meanwhile Eurozone economic data continues to support the rally in the currency. German import prices rose more than expected in the month of October while Economic, Business and Service confidence for November beat expectations. Despite the strength of the euro and the slowdown in the global recovery, Europeans remain optimistic. Earlier this week, the German IFO report increased, indicating that both consumers and businesses share the improved sentiment. Like the U.S., the Eurozone economic calendar is chock full of market moving data. The European Central Bank has a monetary policy meeting at which they are expected to make the big decision of whether they want to continue their 12 month tender or offer adjustable rates on 12 month loans. If they end the tender or move away from a fixed rate, it would be perceived as a hawkish move. German retail sales and employment numbers are also due for release along with Eurozone retail sales and GDP figures. It is also worth nothing that the Swiss Franc is sitting near intervention territory but so far there have been no signs of the Swiss National Bank in the market. Like the UBS consumption indicator, the KoF leading indicator improved in November, which is reflective of the recovery in the overall economy. Swiss GDP and CPI numbers are due for release in the coming week. If EUR/CHF continues to fall towards 1.50, the SNB may be forced to intervene.

CAD: CURRENT ACCOUNT DEFICIT HITS RECORD HIGH

As high yielding commodity linked currencies, the risk aversion in the financial markets over the past 48 hours has taken a big toll on the Australian, New Zealand and Canadian dollars. There have been no economic reports from Australia during that time, but based upon the recent comments from RBA Deputy Governor Battelino, the outlook for the Australian economy remains solid. New Zealand on the other hand is a different story. Business confidence took a big dive in the month of November with the NBNZ index dropping from 48.2 to 43.4. New Zealand’s trade balance narrowed last month but not by as much as the market had anticipated. The Canadian current account deficit also rose to a record high as imports, particularly for vehicles and parts rose faster than exports. The strength of the Canadian dollar is certainly playing a role in bolstering the deficit as it makes Canadians feel wealthier. It will be a big week for Canada next week with GDP, Employment and IVEY PMI numbers due for release. Recent retail sales and trade figures point to the possibility of growth in September. Australia will also be in focus with a Reserve Bank meeting on the calendar. After raising interest rates two months in a row, there is a 50-50 chance that the RBA will pause instead of raising rates again. Bear in mind, the RBA has never hiked rates 3 months in a row. Retail sales, service and manufacturing PMI are also due for release from Australia. The price action of the New Zealand dollar on the other hand will most likely be left to the whim of the markets as there is little NZ data on the calendar.

GBP: GDP REVISION FALLS SHORT

Like the Euro, the British pound was hit by a wave of volatility over the past 24 hours. With no economic data released from the U.K. over the past 48 hours, the sterling moved in complete lockstep with its neighboring currency. This cohesiveness can be seen through EUR/GBP, which ended the day virtually unchanged. However there were some comments from U.K. officials - Bank of England member Bean said he was disappointed by the Q3 GDP numbers and he would not be surprised if the economy grew in the last 3 months of the year and strengthened further beyond that. Yet Chancellor Darling will be revising down his 2009 GDP forecast from a range of -3.25 percent and -3.75 percent to -4.75 percent. The U.K. recovery continues to be among the weakest to the concern of government officials. In the coming week, we will get some more current readings on the economy from the service, manufacturing and construction sector PMI reports.

EUR/USD: Currency in Play for Next 24 Hours

The EUR/USD will be the currency in play over the next 24 hours with U.S. Chicago PMI at 9:45AM ET or 2:45 GMT.

The EUR/USD staged an extremely impressively intraday reversal that brought the currency pair from the cusp of entering the sell zone, which we determine using Bollinger Bands to the cusp of entering the buy zone. If the EUR/USD manages to rally back above 1.5015, the previous downtrend in the currency would be completely negated on a technical basis and a retest of 1.5145, the year to date high becomes likely. However should the currency pair fail to recapture that level, we could see a move back towards 1.4830, the 50-day SMA.

Comments (1)

FxZ

November 29, 2009 at 09:02 AM ET

Great analysis
cheers

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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.