Forex Market Update: Risk Makes A Comeback After Weekend Developments On The Dubai Front

Market openings after the long weekend look set to make for a volatile session

HEADLINES - PREVIOUS SESSION

• NZ Oct. Building Permits out at 11.7% m/m vs. revised +5.5% prior
• JP Nov. Nomura/JMMA PMI out at 52.3 vs. 54.3 prior
• AU Nov. TD Securities Inflation out at +0.3% m/m, +2.1% y/y vs. -0.3%/+1.2% prior resp.
• JP Oct. IP out at +0.5% m/m, -15.1% y/y vs. +2.5%/-13.4% expected and +2.1%/-18.4% prior resp.
• AU Oct. HIA New Home Sales out at -6.0% m/m vs. -4.5% prior
• UK Nov. GfK Consumer Confidence out at -17 vs. -11 expected and -13 prior
• UK Nov. Hometrack Housing Survey out at +0.2% m/m, -2.9% y/y vs. 0.2%/-4.2% prior resp.
• AU Oct. Private Sector Credit out at flat m/m, +1.1% y/y vs. +0.2%/+1.6% expected and -0.1%/+1.7% prior resp.
• AU Q3 Company Operating Profit out at -2.1% q/q vs. flat expected and revised -7.0% prior
• AU Q3 Inventories out at +0.8% vs. -1.0% expected and revised -3.1% prior
• JP Oct. Labour Cash Earnings out at -1.7% y/y vs. -1.9% expected and -1.6% prior
• JP Oct. Vehicle Production out at -19.1% y/y vs. -21.6% prior
• JP Oct. Housing Starts out at -27.1% vs. -33.5% expected and -37.0 prior
• JP Oct. Construction Orders out at -40.1% y/y vs. -14.0% prior

THEMES TO WATCH - UPCOMING SESSION

• UK Consumer Credit (0930)
• UK Mortgage Approvals (0930)
• UK M4 Money Supply (0930)
• EU Euro-zone CPI Estimate (1000)
• CA Industrial/Raw Material Prices (1330)
• CA GDP (1330)
• US Chicago PMI (1445)
• US NAPM - Milwaukee (1500)
• US Dallas Fed Manuf. Activity (1530)

Market Comments

Holiday-thinned markets endured a roller-coaster ride in the closing stages of last week with the headlines surrounding the standstill on debt repayments by Dubai World promoting a broader risk aversion trade - whacking equities and supporting both the dollar and bonds.

Weekend developments regarding this situation appeared to calm some initial fears with signs that Abu Dhabi was considering stepping in s a quasi 'white knight' - though very much on a selective, case-by-case basis. In addition, the UAE authorities announced an emergency facility to support bank liquidity for commercial banks in local markets. General consensus appears to be that the absolute exposure amounts held by banks are relatively small in comparison to the write-downs of $1.7 tln of toxic assets by European and US banks during the credit crisis.

At the start of this week, risk appears to have been brought back to the table since the start of trading in Asia, making it seem that the 'wake-up call' for the recent strong equity rally had hit the snooze button. With month-end factors also playing a role, liquidity was still an issue and moves looked a tad exaggerated on the volumes going through. Nevertheless, the dollar eased back and the JPY followed suit while equity markets were enjoying a field day with gains of 2%+. Late in the Asian session there was a negative kneejerk reaction news that Nakheel, the Dubai property developer, had asked for the suspension of three sukuk bonds on Dubai and Nasdaq until it was in a position to 'fully inform the market' (own emphasis).

As USDJPY was testing 2-day highs, local Japanese press was reporting comments from Finance Minister Fujii that the government would not intervene in the currency markets to weaken the JPY, although he did subsequently add that the government would closely work with the Bank of Japan to deal with the strengthening JPY. The comments came after discussing the USDJPY exchange rate with PM Hatoyama last night. PM Hatoyama also ordered cabinet ministers to include measures aimed at coping with the JPY's rapid appreciation and the decline in the Japanese stock market in a supplementary budget for fiscal 2009. The new extra budget has been expected to be worth around ¥2.7 tln before such additional measures had been mentioned.

The post-Thanksgiving headlines are usually dominated by 'Black Friday' spending - seen as the first indicators of retailers' prospects during the busy holiday season. The WSJ reported that spending rose marginally, only 0.5%, after a strong start. Last year's statistics showed a 3% increase over 2007 and hence Friday's numbers look a tad worrisome, analysts note. However, on-line sales registered strong growth, up some 35% from a year earlier. Nevertheless, markets appeared to ignore the anecdotal evidence and buy into the equity market rally anyway.

The Australian data releases this morning were a mixed bunch and, together with some mildly hawkish comments from RBA MPC member McKibbin (global monetary policy is too loose and needs to be unwound quickly), markets are poised for tomorrow's RBA policy review with a matched 50/50 split on the outcome.

Before that however, today's data releases will feature UK consumer credit and mortgage approvals and flash Euro-zone estimates for CPI in November. The US session sees Canadian GDP numbers for both September and Q3 while US releases a focused on Chicago/Milwaukee PMI data and the Dallas Fed manufacturing activity.

Saxo Bank

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