Markets in Asia and Europe opened lower this morning as fears continue to grow over the potential fall-out should Dubai World – described as the “centerpiece” of the Dubai’s economy – fail to meet upcoming debt obligations.
“You can’t just say to the world: ‘I don’t want to pay my debts’. There is no income coming in from any of these properties. I think this is shocking PR”, said David Buik, senior partner at BGC Partners.”
BBC News
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!
Japan’s Finance Minister, Hirohisa Fujii, said today that the government is “very closely” watching the yen after the currency rose to a 14-year high against the dollar. An appreciating yen is especially worrisome to Japan’s government as Japan is heavily dependant on its exports and any increase in the value of the yen, raises the costs of its exports. A higher valued yen simultaneously increases deflationay pressure on Japan’s ecoonomy by making imports less costly for consumers.
“If currencies make abnormal movements, we may need to take appropriate action,” Fujii told reporters in Tokyo today. “Now we’re at the stage where we need to closely monitor movements in currency markets.”
Oil prices fell to $77.36 a barrel in mid-day trading in Europe today as concern grows over demand for energy and the speed of recovery in key markets including the United States. Crude prices jumped yesterday, but recent indicators suggest economies are not recovering as quickly as previously believed.
“It should be noted that fundamentals remain weak, as current above-average temperatures raise concerns for oil demand levels in the U.S.,” Sucden Financial Research said in a report.
Demand from China, however, has grown in the last two months at its fastest pace in five years as analysts forecast 10 percent economic growth in the fourth quarter.
“The recent data mark a significant acceleration in Chinese demand,” Barclays Capital said in a report. It predicts oil will average $85 a barrel next year and $137 in 2015.
Trading is closed Thursday in the U.S. for the Thanksgiving holiday.
Associated Press
Dubai World – a state-controlled investment company specializing in massive infrastructure projects – is seeking an extension in repaying an estimated $60 billion in debt. The request include $3.52 billion in bonds due December 14th from Dubai World’s property unit Nakheel PJSC following a ratings downgrade from Moody’s and Standard and Poor’s.
Extending the maturity of Nakheel debt is feeding the market’s uncertainty on which debt Dubai will honor in full,” said Rachel Ziemba, a senior analyst covering sovereign wealth funds at New York-based Roubini Global Economics. “They look desperate and the market is concerned that in the long term Dubai’s indebtedness is rising not falling.
Bloomberg
Holidays are supposed to be boring for markets. However, last night was a different matter. It seems that the forex markets execution of an extraordinary large stop-loss provided the traders with the jitters. The EUR and CHF cross related currencies saw the SNB intervening and buying USD’s. Their actions in the short term could be rather productive. Technically they have caught the market exposed as its less liquid during Thanksgiving. Most of these currency moves that will take place over the holiday season will seem irrational. Liquidity and lack of it, will create a difficult volatile trading environment where both the technical’s and fundamental’s take a back seat!
The US$ 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.
Yesterday’s US unemployment claims is on an ‘improving trend’. The number of claimants filing last week fell to its’ lowest level in over a year (+466k vs. +501k) as the US economy tentatively improves and persuades or encourages companies to lay off fewer workers. A tourniquet has been applied to the bleeding so it seems! Let next weeks NFP be the judge of that. Digging deeper, one notices that the number of people receiving unemployment insurance dropped, a similar scenario with those receiving extended payments. Looking at the less volatile component, the 4-week moving average of initial claims happened to also soften from the previous week to +496.5k from +513k. Another sub-component continuing claims declined by -190k to 5.423m vs. market expectations of 5.57m. However, it’s worth noting that continuing claims does not include the number of individuals receiving extended benefits. The number of individuals who have used up their traditional benefits and moved along to extended benefits actually fell by -18.2k to +4.18m, w/w.
It was a surprise, but not that surprising to see that the sales data for US new homes beat market expectations yesterday (+430k vs. +408k, w/w). Buyers continued to take advantage of Obama’s tax credit before it expires next year. With sales advancing +6.2%, it managed to print the highest level in over a year. Technically, rising demand shows that Obama’s incentive for first-time buyers (expanded to include current owners) maybe helping to drag housing out of its worst slump in 50-years. On the flip side, house prices should remain depressed as the constructive industry’s inventory levels continue to compete with record foreclosure numbers that is being fuelled by unemployment. Foreclosure filings surpassed the +300k mark for the eighth straight month in Oct.!
Other early morning data yesterday revealed that personal spending actually increased last month (+0.7%), more than forecasted, however Sept. was revised down a tick to -0.6%. Orders for durable goods unexpectedly declined -0.6% on lower demand for defense equipment, interestingly the previous months was also revised higher to +0.2%. Finally, the US Michigan Consumer sentiment index fell to 67.4 vs. 70.6 last month (second consecutive monthly fall) as the fear of further job losses encourages less consumer spending as we head into this ‘extraordinarily’ long holiday period, which seems to be getting longer as retailers try to squeeze ever last ‘hoarding dollar’. With the unemployment rate having broke that psychological +10% barrier in the US, the consumer who account for 70% of the economy, will limit their contribution to growth in the short term.
The USD$ is currently higher against the EUR -0.46%, GBP -1.08%, CHF -0.52% and JPY +0.50%. The commodity currencies are weaker this morning, CAD -0.79% and AUD -1.46%. The loonie remains in a tight trading range despite touching new weekly highs yesterday after the CBR (Russia) indicated that they would be adding the CAD to their required reserves and by default liquidating some of the USD exposure. 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 only provide a stronger bid to growth currencies on any dollar rallies in the medium term. Technically, the loonie is lacking clear direction in amongst the tight 3c trading range. Currently, within this range, intraday traders are been squeezed daily out of the core positions, whether it’s commodity prices pushing the loonie or risk aversion. Dealers continue to be better buyers of the CAD on USD rallies as the buck’s bear trend remains well established. Governor Carney at the BOC has got to be worried. If the loonie appreciates too strong, too quickly, one should expect policy makers to make a concerted effort to at least slow the process down.
The AUD had its largest loss in over a month in last night’s session, as investors gravitated towards the JPY on speculation that global policy makers will allow further USD weakness. Risk aversion trading strategies are dominating the currency market at the moment. The AUD also came under pressure after a report showed that business investment unexpectedly declined last quarter (-3.9% vs. +1.1%). 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’. That question now seems to have been answered by his deputy, as once again futures traders lay their bets. The currency remains well supported by commodity prices and expects dealers to be strong buyers on much ‘deeper’ pullbacks (0.9177).
Crude is lower in the O/N session ($76.92 down -104c). Crude oil advanced yesterday as the greenback once again weakened against most of its major trading partners on signs of a global economic recovery. Stronger US fundamentals yesterday boosted the investment appeal of commodities. Last week’s EIA report was close to being bang-on. 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. OPEC is expected to remain on hold in a couple of weeks because of their concerns about tipping global economies back into contraction. Another tight range to endure so it seems!
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 another record high in the O/N session as the greenback once again faltered on the rumor 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. Expect the bulls to continue to dominate all of the action and remain strong buyers on ‘any’ pull backs even if the USD finds support from risk aversion trading strategies ($1,184).
The Nikkei closed at 9,383 down -59. The DAX index in Europe was at 5,691 down -111; the FTSE (UK) currently is 5,267 down -97. The early call for the open of key US indices is lower. The US 10-year bond eased 5bp yesterday (3.27%) and are little changed in the O/N session. Yesterday’s $32b 7-year auction (the last of this week’s issues totally $118b) was once again well received. The bid-to-cover ratio was to 2.76 vs. the average of 2.53. Despite record low yields, all three auctions surpassed market expectation of demand as indirect bidders, usually Cbanks, took close to 60% of the entire product. Overall the market remains better bid, despite more positive fundamental data out of the US as 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!
As I’m getting ready to take off for Thanksgiving, was just taking a look through some different charts and noticed this one on dollar/yen (USD/JPY): (click chart to enlarge)
This 10-year chart of USD/JPY shows that the dollar is at its weakest against the yen in over 10 years! Remember that when this chart makes new “lows”, it actually means strength for Japanese yen. And you thought I was kidding about dollar weakness in my article below!
To learn more about how to use charts in your analysis, be sure to check out our currency trading courses!
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Happy Thanksgiving to All!
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As I gear up for the holiday invasion and the ensuing gluttony that’s about to transpire, I can’t help but look forward to my next vacation. I’m thinking somewhere tropical, perhaps the Caribbean, enjoying drinks with little umbrellas in them. I lull myself into daydream, counting waves and sunsets as island music fills the air. Yet all is not perfect. And then it hits me like a ton of bricks—the calypso music I’m hearing is being played by none other than our esteemed Fed Chairman Bernanke! He’s wearing a Panama Hat and a blousy Hawaiian shirt, playing a version of the Limbo: how low can you go! Only the participants aren’t drunken tourists, but dancing US dollar bills, each trying to squeeze under a rapidly sinking bar to Bernanke’s amusement! The pleasant daydream has now become a nightmare, as I realize that I can’t afford another Painkiller with the mountain of cash I place on the bar. I awake in a cold sweat. Thankfully it is just a dream. Or is it?
We are all aware of the trying economic times we are experiencing and the fact that we haven’t gone off the cliff (yet) is something that I am thankful for. Now that we seemingly have avoided Depression (again yet), we find ourselves mired in a serious recession and there is great debate about how to get out of it.
One of the prevailing themes and the one espoused by those charged with figuring this out is that the path to prosperity is through dollar destruction. Since the dollar has been tanking thanks to Bernanke’s zero interest rate policy (ZIRP), both the stock market and the commodities markets (particularly gold) have seen tremendous gains (relative to where they were before last fall) as well as other currencies.
This has led to the “tale of two trades”, which I have outlined in previous articles. The irony of this is that in order for the dollar to advance, we need to see inflation so the Fed will raise rates. The fact that we are not seeing inflation but rather serious deflation means that the dollar will continue to fall until it reaches its “breaking point” whether we are out of recession or not.
However, there is another way that the dollar can rise without raising interest rates. It’s called the risk aversion trade and will come back into fashion as investors become more skeptical /less confident in the world and particularly the United States recovery. I wrote recently about how the Fed massages the numbers and jaw-bones the dollar so at this point it shouldn’t come as a shock to anyone.
So if you want a stronger dollar, you have to be prepared to accept worsening conditions. Things like GDP revisions and less-bad-but-not-quite-good-employment figures all keep the dollar from crashing.
So where is the breaking point for the dollar? How low can it go?
Well rather than try to throw out some technical mumbo-jumbo, or attempt to rationalize the irrational, I’m going to leave you with this thought: the Dollar will continue to decline until things look so bad that the US dollar carry trade starts to unwind as the “flight to safety” takes effect; or if conditions actually do improve enough for the Fed to raise rates.
The first scenario is likely to happen more rapidly than the second. The dollar funded carry trade is getting crowded so all its going to take is one timely placed comment or economic number to send everyone running for the door. This will provide a temporary lift and is intended to buy the Fed time for the second scenario to happen.
The second scenario is a bit more involved and likely to cause the economy to “get worse before it gets better”. Sacrifices will need to be made and I hope that we have the political fortitude to do so.
But until that happens, I’ll keep hearing those steel drums in my dreams and seeing those dancing dollars making new lows.
So for this Thanksgiving I’ll be thankful that as of right now, they will still take dollars for my favorite Caribbean drink! Anything else at this point is just gravy.
Happy Thanksgiving to All and be sure to check out our currency trading courses!
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Publically, the Federal Reserve has been consistently on-message with its assertion that interest rates will remain low for “an extended period”. Fed Chairman Ben Bernanke has used this expression several times in recent communications, while Federal Reserve Bank of St. Louis President James Bullard went so far last week as to say that it could be 2012 before the Fed makes any meaningful hikes to interest rates.
Despite assurances that interest rates are destined to remain ultra-low for the near future, a quick reading of the FOMC minutes from the November meeting shows that the Fed is still keeping a close eye for possible “negative side effects” of its interest rate policy. In particular, the Fed is considering “the possibility that such a policy stance (i.e. low interest rates) could lead to excessive risk-taking in financial markets or an unanchoring of inflation expectations”.
While the minutes suggest that the probability of excessive speculation arising from the near-zero interest rates is “relatively low”, the Fed did feel it necessary to send a message to the “hawks” who worry that inflation will be the next crisis. The minutes did not layout the exact inflation conditions that would trigger a rate hike, but based on the Fed’s public stance, it is safe to say that rampant inflation is not currently seen as a realistic threat. Throw in the fact that employment remains a major concern, and the possibility of inflation requiring interest rate corrective action next year becomes even more remote.
Speaking of employment – which along with price stability comprises the two mandated areas of responsibility for the Federal Reserve – the Fed minutes revised slightly, the earlier unemployment projections for 2010. The Fed now expects unemployment to fall within a range of 9.3 percent to 9.7 percent by the end of next year, compared to an earlier estimate of 9.5 percent to 9.8 percent. The current unemployment rate as of October is 10.2 percent so the Fed is expecting some improvement on the employment front.
Another key point addressed in the FOMC minutes is the difficulty small business and individuals still face in securing credit. Despite an overall easing of capital in the financial markets, the minutes note that “financing conditions differed for large and small firms” and it is mostly the large companies that are able to take advantage of the improving credit conditions.
Indeed, access to credit remains the fly in the Fed’s ointment, and until credit can be more equally directed at these smaller firms, it will be difficult for the Fed to foster an environment better capable of expanding the job market. This could well be the area for which the Fed comes under attack as more than 7 million jobs have been lost since the beginning of 2008, and while the rate of jobs being lost has slowed in recent weeks, there is no expectation that the trend will reverse any time soon.
Quite frankly, I find the Fed’s employment projections for the end of next year to be a bit of a stretch. If in fact the rate does fall to the range put forward by the Fed, I think it will be mostly due to the fact that those unemployed for more than six months are no longer included in the count.
Publically, the Federal Reserve has been consistently on-message with its assertion that interest rates will remain low for “an extended period”. Fed Chairman Ben Bernanke has used this expression several times in recent communications, while Federal Reserve Bank of St. Louis President James Bullard went so far last week as to say that it could be 2012 before the Fed makes any meaningful hikes to interest rates.
Despite assurances that interest rates are destined to remain ultra-low for the near future, a quick reading of the FOMC minutes from the November meeting shows that the Fed is still keeping a close eye for possible “negative side effects” of its interest rate policy. In particular, the Fed is considering “the possibility that such a policy stance (i.e. low interest rates) could lead to excessive risk-taking in financial markets or an unanchoring of inflation expectations”.
While the minutes suggest that the probability of excessive speculation arising from the near-zero interest rates is “relatively low”, the Fed did feel it necessary to send a message to the “hawks” who worry that inflation will be the next crisis. The minutes did not layout the exact inflation conditions that would trigger a rate hike, but based on the Fed’s public stance, it is safe to say that rampant inflation is not currently seen as a realistic threat. Throw in the fact that employment remains a major concern, and the possibility of inflation requiring interest rate corrective action next year becomes even more remote.
Speaking of employment – which along with price stability comprises the two mandated areas of responsibility for the Federal Reserve – the Fed minutes revised slightly, the earlier unemployment projections for 2010. The Fed now expects unemployment to fall within a range of 9.3 percent to 9.7 percent by the end of next year, compared to an earlier estimate of 9.5 percent to 9.8 percent. The current unemployment rate as of October is 10.2 percent so the Fed is expecting some improvement on the employment front.
Another key point addressed in the FOMC minutes is the difficulty small business and individuals still face in securing credit. Despite an overall easing of capital in the financial markets, the minutes note that “financing conditions differed for large and small firms” and it is mostly the large companies that are able to take advantage of the improving credit conditions.
Indeed, access to credit remains the fly in the Fed’s ointment, and until credit can be more equally directed at these smaller firms, it will be difficult for the Fed to foster an environment better capable of expanding the job market. This could well be the area for which the Fed comes under attack as more than 7 million jobs have been lost since the beginning of 2008, and while the rate of jobs being lost has slowed in recent weeks, there is no expectation that the trend will reverse any time soon.
Quite frankly, I find the Fed’s employment projections for the end of next year to be a bit of a stretch. If in fact the rate does fall to the range put forward by the Fed, I think it will be mostly due to the fact that those unemployed for more than six months are no longer included in the count.
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