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Forex − Worries About Dubai & Thin Liquidity Hurts Risk Correlated Trades

Fri, Nov 27 2009, 10:52 GMT
by Peter Rosenstreich

ACM - Advanced Currency Markets

Forex News and Events:

Concerns over Dubai World quasi-sovereign debt restructuring situation was still haunting risk correlated trades in the Asian session. And combined with thin liquidity has made for a volatile Friday. Asian equities markets were lower across the board, with the Hang Seng falling -4.8%. US 10yrs Trsys have gapped down to 3.20%, while Gold is down nearly $50 from Thursday's high. USD has seen invigorated buying, with EURUSD slipping to 1.4828 at the time of writing. The other big gainer, to the alarm of Japanese policy makers, has been the JPY. MoF intervention rhetoric increased significantly and Finance Minister Fujii provided markets his harshest warning yet, saying that "appropriate measures" were now justified as there was "no doubt the market has moved too far in one direction" and current FX moves were “extreme”. He also said that speaking with US and European officials to coordinate an international response would be a possible direction. News wires were citing market sources, which say BoJ was seen in the market checking rates in cross-JPY. The increased interventions risks seem to help, as the USDJPY bounce of the 84.83 low trading up to 86.83. On the economic front, the jobless rate fell unexpectedly from 5.7% in July to 5.5% in August and 5.3% in September while real household spending rose 1.6% y/y in October. While the Dubai story is still evolving, we expect at present, the knee-jerk fear of a systemic collapse are over blown. On the surface, the numbers, while large, are not unmanageable especially given Dubai's close relationship with cash heavy Abu Dhabi. And unlike in 2008, where policy makers were caught off guard, this time they are prepared and would respond with decisive action to prevent an extended market disruption. And in a move to control damage H.H. Sheikh Ahmed bin Saeed Al-Maktoum, Chairman of the Supreme Fiscal Committee, issued a statement yesterday reaffirming / clarifying the Dubai Government's intention to intervene directly and supervise the restructuring of Dubai World's debt obligations. What this event does highlight is the tendency for short term traders to cut positions at a moments concern, making risk correlated rallies very fragile.

Today's Key Issues (time in GMT):

08:30 SEK GDP, % q/q Q3 0.2 (-6.1) prior
08:30 SEK Retail sales, % m/m Oct 0.2 (2.6) prior
09:00 PLN GDP, % y/y 3Q 1.1 prior
10:00 EUR Consumer confidence, index Nov -17 exp, -18 prior
10:00 EUR Industrial confidence, index Nov -19 exp, -21 prior
10:30 CHF KoF leading indicator Nov 1.45 prior
14:00 MXN Banxico rate decision, % Nov 4.50 prior / exp

The Risk Today:

EurUsd Having triggered stops on the topside earlier week, EURUSD has failed to maintain its upward momentum and since collapsed through previous resistance-turned-support around 1.4975 to touch a low of 1.4828 (just below the 50 day moving average at 1.4835). We will need to see a breach of major support (and lower bound of the previous range) at 1.4800 to ensure a continuation of the correction; and a close through 1.4626 (3 Nov lows) would likely signal we have seen top for this leg of the rally. Although a further sell-off through 1.4489 will likely accelerate the downside move, the longer term uptrend remains valid as long as we stay above 1.4135. Key resistance on the topside lies at 1.5144 recent highs.

GbpUsd The bearish bias remains for GBPUSD as the break below the 100-day moving average at 1.6395 suggests that the uptrend from 1.5708 (Oct 13 low) to 1.6875 is now over. Expect fresh selling interest ahead of 1.6746 Wednesday highs, and look to 1.6250 downside target below which represents a major support for the pair. A break below 1.6250 would expose 1.6130 previous resistance-turned-support, and target 1.5700-50 area last seen in early October (1.5705 key support).

UsdJpy USDJPY’s sell-off has continued overnight, spiking through the bottom end of the 8 month trend channel around 86.30 to touch lows of 84.83. We have since traded back into the channel at the start of the European session, but expect any subsequent corrections to be capped by decent supply at 88.20

UsdChf Like EURUSD, USDCHF failed to sustain its recent break out, but more specifically; this morning’s sharp reversal above 1.0175 levels suggests a major double bottom scenario could be materializing with a potential neckline coming in at 1.0340. A break above this level would look to target another look above 1.0700 levels, and really the USDCHF bears will need to see another dip below 0.9918 previous lows to negate this outlook.

Resistance and Support:

Published on  Fri, Nov 27 2009, 10:58 GMT