IB FX View

UAE central banks offer local respite – yen rises

Monday November 30, 2009

Caution remains the catchword as traders resume business after a holiday weekend in the U.S. The dollar has opened lower after the central bank of the United Arab Emirates said it would stand behind local lenders and that of Abu Dhabi said it would provide liquidity to borrowers using a special lending facility. Such swift actions may take much of the sting out of the possible debt default from Dubai World on some of its $59 billion in loans. The strength of the Japanese yen serves to remind us that the investment world remains in a cautious mood and at this stage of the game conveys a preference for the Japanese rather than American currency.  


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The dollar index is lower to commence the week as investors have stopped looking for further fallout from the Dubai situation. The announcement from the UAE over the weekend has helped restore confidence that local lenders at least would not be allowed to fail as a result of Dubai World’s attempt to reschedule its loan repayments. Having reached a weak point of $1.4828 last week, the euro almost reached $1.51 in European trading as investors reassessed the situation. Currently the euro buys $1.5028 as news continues to flow out of the Emirates.

The massive commercial and building expansion in Dubai riding high on the crest of the wave of global health over the last several years resulted in a borrowing and leverage binge unlike any other. According to estimates of the conglomerates borrowings, Dubai World owes $59 billion to creditors, which was used to build palatial resorts and hotels and create a luxurious Mecca to cater for the business center of the Middle East. The announcement of a possible payment freeze took the region and its creditors by surprise, while bankers are still adding up their exposure.

The debt-debacle has cracked open the issue of a rising Japanese yen, which late last week reached a 14-year high against the dollar at ¥84.63. Implied options volatility surged to reflect ongoing uncertainty on its direction. On the one hand an escalation of current events could spur the yen on a strengthening trajectory towards ¥80, while the specter of intervention by the Bank of Japan on behalf of the Prime Minister Hatoyama’s government could send the yen reeling towards ¥90. The yen also rose against the euro and currently stands at ¥129.63. Currently the dollar buys ¥86.32.

According to one Japanese newspaper the PM discussed the exchange rate with finance minister Fujii on Sunday and wrote off intervention. However, in discussing the report with other journalists fixated with the burning issue of the yen’s value, Mr. Fujii denied that he’d ruled out moves to directly weaken the yen.

The yen’s strength couldn’t come at a worse time for the domestic economy. Today a report was expected to show an improvement in the state of the industrial sector, where output was predicted to build on a September increase of 2.1%. In the event the report showed a meager 0.2% gain rather than the 2.5% analysts had expected.

The pre-market indication from the U.S. equity market appears to be anchored around unchanged, with the S&P futures trading in both red and black territory throughout the early morning. Should investors sweep the Dubai-related jitters under the carpet, the dollar will likely face a further decline.

In Asian trading overnight the return of risk appetite sent local bourses sharply higher. The Australian dollar recouped losses as investors position ahead of Tuesday’s Reserve bank meeting where there remains a strong expectation that the central bank will lift its key benchmark interest rate for a third consecutive meeting to 3.75%. The Aussie dollar today buys 91.30 U.S. cents.

The Canadian dollar also improved as risk appetite returned, but moreover as commodity prices stopped giving back recent gains. The prices of gold and crude oil, although moving in opposite directions, show that investors are no longer preparing for wholesale liquidation and therefore a resumption of economic malaise. As such the Canadian dollar grew in stature once again adding to 94.55 U.S. cents.

The British pound seemed to stumble on its own this morning. An earlier rebound on growing risk appetite was thwarted by a slew of monetary data indicating a still moribund recovery. Net consumer credit contracted in the latest Bank of England data even though mortgage approvals and lending grew to an 18-month high. It would appear that consumers are less willing to earmark additional repayments to the household budget as unemployment continues to rise while for their part lenders remain selective about who is worthy of a loan.

The pound is still higher against the dollar on the session at $1.6485 but lost the wind from its sails after a consumer confidence survey painted a less optimistic picture going forward. The Gfk NOP poll showed a deteriorating picture with its confidence index slipping four points to read negative 17. Consumers responding to the question of whether now is a good time to make a purchase responded with a net negative seven point response shifting that index further into reverse gear with an index reading of negative 19. The euro rose to buy 91.15 pennies as investors pondered the prospects for the British economy.

The fact that property-seller, Hometrack reported a marginal nationwide gain for British home prices last month pretty much fell between the cracks. Home sellers stood to the sidelines and preferred not to list properties for sale rather than sell at what they see as depressed prices. Prices of million-pound-plus homes in central London continued to gain in price.  


Andrew Wilkinson                                                                    

Senior Market Analyst                                                               ibanalyst@interactivebrokers.com       


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