So what is the impact of the situation in Dubai?
Currencies Direct November 30th 2009 - 2 minute read
… Well so far, nobody is really sure. Given that both Abu Dhabi and the UAE Central Bank have quickly come forward to assure markets of their support for the beleaguered Emirates State, then the financial impact should be quite minor. Certainly, there will be repercussions for Western lenders and there is no guarantee that Dubai’s ‘fairy godmother’ will stand behind its liabilities carte-blanche but equity markets are viewing the situation as containable.
The potential problem is any growth in concern over global Sovereign stability and the fact that CDS spreads have continued to widen suggests that even though things look calm on the surface, there is a lot of thrashing about below the surface. If things do begin to look a little dire, then expect the Dollar to come back into focus as risk aversion trades re-emerge.
Despite markets starting to draw their horns in for the run up to Christmas, there might be just time for one more spate of trading especially if the support for Dubai offered from the UAE Central Bank is less rather than more. This morning’s Dollar decline, on expectations of a successful outcome to the Dubai World debt restructuring, looks a little premature – look for a bounce of any contrary news.
Other weekend news was largely centred on Japan where intervention chatter continued to reverberate around the markets and officials maintained their stance on the current volatility in foreign exchange rates. Fujii has denied saying that he wouldn’t intervene in the FX market but this doesn’t mean that he would. Others talk of bold and swift action by the Bank of Japan to counter the Yen’s current strength. No sign of anything yet. Japanese data was weak this morning with industrial production much weaker than expectations. The authorities need to conjure up something – and quick.
This morning’s UK data was also weak. The November GfK consumer confidence index deteriorated steeply to -17 from -13 in October. The market had been looking for an improvement to -11. The UK’s CBI warned of the possibility of double dip, noting that service sector activity deteriorated in th three months through November, with consumer service businesses seeing activity well below normal for the time of year. Also, BDO, the accountancy group, suggested the BoE’s forecasts were too optimistic and that its own surveys were not showing any signs of a significant recovery. Other than that, all is rosy in the garden. MPC member Posen was in the papers talking forward looking policies. He said that it is too early to exit the UK’s current policy stance though he added that there should always be time to talk about suitable plans. Sterling starts the week as it finished last week, on a softer note. There is plenty of data this week to keep markets interested starting with some US data this afternoon. The 1st major interest though, will be the result from this month’s Reserve Bank of Australia policy meeting, taking place in the early hours of tomorrow morning. Even though the odds on the Central Bank leaving rates as they are have shortened, I still think that a combination of continuing strong data releases from both Down Under and China plus the very long gap between this, and the next scheduled meeting will mean that the RBA will hike tomorrow.