Dubai not distressed, Dollar gets dumped!

Is that it? Dubai World’s problems are just a blip on our confidence radar. Is there a potential chance of a sovereignty default? How can we ever say ‘never’? Last year, all we heard was that they are too big to fail. The mighty fell and we are still paying for it. The U.A.E Cbank ‘stands behind’ the country’s local and foreign banks losses. It seems that the problem is solved temporarily for now. It’s the trickle down and compounding effect into emerging markets that will play havoc with the investors’ psyche. An interesting note, US equities have sold off the last five Mondays after thanksgiving. Last year we had a 9% bloodbath and welcome back from the holidays!

The US$ is weaker in the O/N trading session. Currently it is lower against 11 of the 16 most actively traded currencies in another ‘whippy and illiquid’ trading range.

All weekend we had Tiger refusing to talk to authorities and other authorities diffusing Dubai World’s financial woes. The markets seem to have their ‘rational’ head screwed on this morning. Why? Firstly the U.A.E is acting as a back stop. Secondly, various reports are reassuring and indicating that DW is still open to full payment of the Nakheel bond due on Dec.14th. And finally, and the strongest backing to date, Abu-Dhabi, will grant a ‘selective bailout’. All this has led to resurgence in risk taking and dollar loathing again. This little episode is a strong reminder that ‘global surprises’ remain in the background. Financial systems are fragile, their exposures remain too high and investor’s nerves are frayed. Anything else out in left field and we will see a much larger sell off!

The USD$ is currently lower against the EUR +0.10%, CHF +0.13% and JPY +1.02% and higher against GBP -0.33%. The commodity currencies are mixed this morning, CAD +0.21% and AUD -0.10%. The loonie is threatening to burst out of it tight trading range as commodity prices stabilize after last week’s collapse on the back of weaker global equities. The CAD dollar ended on a winning note on Friday as the CBR (Russia) indicated that they would be adding the currency to their required reserves and by default liquidating some of the USD exposure. Is it done or have they been doing it piecemeal? who knows. 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’. Rumors of other Cbanks like India again expressing their willingness to add more gold will eventually provide a bid to growth currencies. 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 as we conclude month ending requirements.

We are down to the wire. The AUD remains better bid this morning in anticipation of the RBA is to raise rates this evening for a third time this year (3.50%).The currency managed to climb for the first time in three days after the U.A.E central bank offered more money to lenders facing losses on Dubai World, which is fueling gains in higher-yielding assets. It’s worth noting that 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 this year. He said that the pace of further rate increases ‘remained an open question’ (0.9134). It seems some dealers are willing to take a ‘flyer’ on this evening’s announcement.

Crude is higher in the O/N session ($76.55 up +60c). Risk appetite is returning, optimism and the reality of a weak dollar is driving commodity prices this morning in the London session. Crude continue to trade within its tight range despite current fundamentals not supporting the underlying product. Elevated prices are not supported by last weeks EIA report which showed that inventories managed to advance to a new 4-week high. Demand destruction is alive and kicking! The report met with analyst’s expectations as 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 the weekly 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.

It’s was no surprise to witness gold jump to new record highs last week on rumors that India may want to add again 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. Despite the commodity paring some of its gains on Friday, the yellow metal remains a strong psychological store of value and an asset for expression for ‘no’ confidence by investors. Demand remains robust on any pull backs, even with a stronger USD ($1,173).

The Nikkei closed at 9,345 up +264. The DAX index in Europe was at 5,653 down -32; the FTSE (UK) currently is 5,222 down -23. The early call for the open of key US indices is higher. The US 10-year bond eased 2bp on Friday (3.20%) and backed up 2bp in the O/N session (3.22%). Last week’s $118b US debt auctions were well received, despite being issued near new record lows. All three auctions (2’s, 5’s and 7’s) surpassed market expectation of demand as indirect bidders took close to 60% of the entire product. Fear of emerging market suffering has investors seek surety of fund investments. Finally, the ‘seasonal’s’ are calling for a flattening rally ahead of ‘month end index extensions’.

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