FOREX TRADING

USD Recovers, Dubai Debt Not Guaranteed

• USD: Mixed, UAE central bank provides liquidity to Dubai, Chicago PMI beats expectations, stocks mixed
• JPY: Higher, Japanese government pledges to take action against JPY rise
• EUR: Mixed, EU CPI rises for the first time in seven months
• CHF: Mixed, tracking improving risk sentiment, EUR/CHF holds above 1.5100
• GBP: Lower, UK consumer confidence declines, mortgage applications rise
• CAD and AUD: AUD & CAD higher, supported by a slight uptick in risk appetite, Canada’s GDP rises

Overview

The USD traded mixed to lower Monday as investors assess the potential fallout from the Dubai debt crisis. A report that the UAE central bank is providing emergency liquidity to Dubai helped to stabilize global financial markets and sparked light selling of the USD as risk appetite improves. The UAE central bank is sending mixed messages about whether they will or will not stand behind the Dubai debt but, at this writing fear of significant fallout or contagion from the Dubai debt crisis has faded. The latest news on the Dubai debt crisis is a report that London banks are looking to put together a bailout plan. General consensus appears to be that the Dubai debt crisis is not another Lehman Brothers. EUR edged higher supported by report of the first rise in EU CPI in seven months. GBP continued to underperform as UK consumer confidence unexpectedly declined in November. Commodity currencies traded higher as risk appetite improves and global equity markets were relatively stable. AUD was supported by rising inflation and RBA rate hike speculation CAD supported by report of the first gain in Canada’s GDP in four quarters. JPY traded higher with gains limited by Japanese government pledge to take action against the JPY rise. US economic data was positive with Chicago PMI reported higher than expected. US equities traded higher after the release of Chicago PMI. USD recovered midsession as Dubai worries continue and the Dubai government says that Dubai World debt is not guaranteed.

The size of the Dubai debt crisis is relatively small estimated at 80 to 90bln. As long as the crisis is contained the impact of the Dubai debt crisis should be limited. Focus turns to the RBA policy meeting Tuesday, ECB meeting Thursday and Friday’s release of US November Unemployment. The RBA is expected to hike rates 25bps but it is unclear if the Dubai debt crisis will cause the RBA to rethink its rate hike. The ECB is expected to leave monetary policy unchanged and announce details of its exit strategy. US unemployment is expected to remain at elevated levels but the pace of nonfarm payroll losses likely continued to slow last month. Risk sentiment remains the main driver for Forex trade.

Today’s US data:

Chicago November PMI rose to 56.1 compared to 54.2 in October, a reading of 53 was expected.

Upcoming US data:

On December 1st October construction spending, November ISM and October pending home sales index will be released along with November domestic auto sales. Construction spending is expected to fall by 0.4% compared to a 0.8% rise last month. The ISM is expected at 55 and 55.7 last month and pending home sales are expected at 110.5 and 110.1 last month. ADP for November will be released on December 2nd expected at -185k compared to -203k last month. On December 3rd initial jobless claims for week ending 11/28 will be released expected at 480k compared to 466K last month along with Q3 final productivity and unit labor costs. Productivity is expected at 8.9% and unit labor costs expected -4.7%. November ISM nonmanufacturing index will be released on December 3rd as well expected 51 compared to 50.6 last month. November nonfarm payrolls and unemployment will be released on December 4th with the unemployment rate expected unchanged at 10.2% and nonfarm payrolls expected -145k compared to 190k last month. October factory orders will be released on December 4th expected at 0.2% compared to 0.9% last month.

JPY

JPY traded mixed Monday despite Japanese threats to take action against the JPY rise. Japan’s PM said that Japan should act swiftly in regard to the JPY rise. Japan’s National Strategy Minister Kan says the Japanese government has agreed to try to stop the JPY appreciation. Kan however failed to say what measures would be taken to stop the JPY rise. There was confusion in regard to statements from Japan’s Finance Minister Fujii about intervention. Initial reports suggested that Fujii did not believe that intervention was possible at this time. Fujii later denied reports that intervention was impossible. Since the end of August when the new government took over leadership in Japan, Fuji has made conflicting statements about whether or not he favored intervention. Sometimes Fujii has tried to be nuanced about his comments in regard to intervention and has a tendency to backtrack on statements that reflect what appear to be comments that he does not generally favor intervention. There appears to be little consensus among the G-20 for coordinated intervention to support the USD. If Japan elects to intervene they will likely be going it alone. The threat of solo intervention from Japan appears to be having limited impact on JPY trade. Today’s Japanese economic data was mixed with October industrial production reported up 0.5%, November manufacturing PMI declined to 52.3 and 54.3 last month, and October housing starts dropped by 27.1%. On balance these reports suggest that Japan’s economic recovery remains weak. Kan also said that Japan plans an extra budget of ¥2.7trln to deal with the impact of rising JPY and drop in the Japanese stock market. BOJ Governor Shirakawa says that the economy is in moderate deflation and the BOJ is closely monitoring FX markets. Shirakawa went on to say that the BOJ will maintain easy monetary policy. JPY traded at a 14 year high versus the USD with USD/JPY falling to a low of 84.82 last Thursday sparked by news that the Dubai World seeks to delay debt payments for two of its flagship firms. Today’s news that the UAE Central Bank is providing liquidity to Dubai world helped to stabilize USD/JPY. JPY turned lower after the release of above expectation Chicago PMI.

Key technical levels to watch in USD/JPY include support at 84.82 the November 27th low and 84.50 the July 1995 low with resistance at 87.50 the November 26th high.

EUR

EUR traded mixed initially supported by report that EU CPI rose for the first time in seven months and in reaction to a slight improvement in risk appetite as the UAE Central Bank provides emergency liquidity to Dubai. EU November HICP rose by 0.6%. EUR experienced a sharp selloff last week sparked by a spike in risk aversion on news of a possible Dubai debt default. EUR managed to close the week higher as fears about the Dubai debt crisis recede. Weekend reports that the UAE is providing liquidity to Dubai helped to boost risk appetite and demand for the EUR. This week’s main focus will be the ECB policy meeting Thursday. The ECB is expected to leave interest rate policy unchanged at 1% and outline details of its exit strategy. Today’s EU CPI report may increase speculation that the ECB will move forward the timeframe for a rate hike. The ECB will also need to take into consideration the strength of the EU recovery as weal as price stability. Focus turns to tomorrow’s release of November unemployment. Continued high unemployment and EU will likely constrain the ECB from aggressive monetary policy tightening anytime soon.

On December 1st EU manufacturing PMI index for November and EU November unemployment will be released. The PMI is expected 50.7 and unemployment is expected at 9.7%. On December 2nd EU October PPI will be released expected at -0.2% compared -0.4% last month.

The technical outlook for the EUR is mixed as the EUR struggles to hold above 1.5000. Expect EUR support at 1.4965 the November 30th low with resistance at 1.5145 the November 25th high.

CHF

CHF traded mixed Monday supported by broad USD weakness sparked by improving risk sentiment. The improvement in risk sentiment is attributed to report that the UAE central bank is standing behind local and foreign banks in Dubai. The UAE liquidity helps reduce fears of global contagion from the Dubai debt crisis. In addition there is a report that major international banks are working on a possible bailout for Dubai World. Last week, USD/CHF broke below parity and it is thought that SNB officials remain quite concerned about the CHF strength. It’s not clear the threat of intervention by the SNB however will have any lasting impact on CHF trade. The SNB was rumored to have sold CHF on November 26th as the CHF rose to parity versus the USD and a five month high versus the EUR. In addition, SNB’s Roth indicated that central banks may need to end stimulus measure soon. His comments would likely undermine SNB intervention efforts. EUR/CHF cross remained stable above 1.5100. On December 1st Swiss Q3 GDP will be released expected at 0.2% compared to -0.3% last quarter along with November manufacturing PMI expected at 54.9 compared to 54 last month. On December 4th November CPI will be released expected flat compared to 0.6% last month. Expect USD/CHF support at 0.9910 November 26th low with resistance at 1.0195 November 23rd high.

GBP

GBP traded lower with gains limited by report of an unexpected decline in UK consumer confidence and comments from BOE’s Posen that it’s too early for the BOE to exit monetary stimulus. UK November GFK consumer confidence declined to -17, a reading of -11 was expected. The drop in consumer confidence generates concern about the outlook for the UK recovery. Posens’ comments leave the door open for future BOE decision to expand its asset purchases. GBP downside was limited by the slight improvement in risk appetite sparked by news of the UAE central bank pledge to provide liquidity to Dubai World and report of a slight improvement in mortgage approvals. October mortgage approvals rose to 57,345k from 56,205k last month. Last week UK reported a slight upward revision in Q3 GDP and improvement in CBI distributive trades. BOE’s Bean suggested that he would not be surprised to see the UK economy return to growth in Q4. Apart from any additional news in regard to the Dubai debt crisis focus will turn next months BOE policy meeting. Bloomberg reports that GBP may be vulnerable to Dubai sales of UK assets to raise capital. The BOE is expected to hold monetary policy unchanged and the level of its asset purchases unchanged at £200bln.

On December 1st November Nationwide House Price Index will be released expected unchanged at 0.4%. Also on December 1st November CIPS PMI Manufacturing index will be released expected 53.9 compared to 53.7 last month.

The technical outlook for GBP is negative as GBP trades below 1.6400. Expect near-term support at 1.6272 the November 27th low with resistance at 1.6595 for November 30th high.

CAD

CAD traded higher supported by a slight uptick in risk appetite and report of improving Canadian GDP. Moody’s says that UAE banks can absorb potential fallout from Dubai debt crisis. This statement from Moody’s along with report that the UAE central bank is providing liquidity to Dubai helped to stabilize risk sentiment. Canada’s Q3 GDP rose by 0.4% with exports reported to have risen by 3.6% q/q. Canadian exports are higher despite strength in the CAD. The quarterly export sales rise may help reduce some of the threat of BOC intervention. Canadian officials have expressed concern that the strength of the CAD could choke off the Canadian recovery. The GDP report confirms that Canada’s economy is emerging from recession but it must be noted that the GDP report came in below expectations. The consensus of economists was for a GDP rise of 0.7%. IPPI and RMPI came in close to expectations with IPPI at -0.3% and RMPI at 2.5%. IPPI price rise has been constrained by stronger CAD. The rise in RMPI reflects higher crude prices. Last week CAD was supported by report that Russia plans to diversify some reserves to the CAD. CAD direction remains closely correlated to the price of commodities and risk sentiment.

On December 4th November Ivey PMI will be released expected at 60 compared to 61.2 last month along with November employment. The November unemployment rate is expected to rise to 8.7 from 8.6% and jobs created at 15k.

The technical outlook for CAD is mixed as USD/CAD trades below 1.0700. Look for near-term support at 1.0450 the November 26th low with resistance at 1.0780 the November 9th high.

AUD

AUD traded higher supported by improving risk appetite as concern about the Dubai debt crisis recedes, RBA rate hike speculation and higher Australian inflation data. There is general expectation that the Dubai debt crisis can be contained. Today’s report of the UAE providing liquidity to Dubai World has lessened concern about contagion from the Dubai debt crisis. The RBA will hold a policy meeting tomorrow and are widely expected to raise interest rates 25 bps to 3.75%. The RBA rate hike speculation intensified in reaction to a statement from the RBA’s McKibbin that rates must be raised quickly to avoid fueling asset bubbles and in response to the report of higher November inflation. Last Wednesday, RBA Deputy Governor Battellino said that he expects the economic rebound to last for a few more years. His comments were seen as hawkish and an indication that the RBA would not hesitate in hiking interest rates at the RBA policy meeting on December 1st. Australia’s November TD MI inflation index rose by 0.3%. The rest of today’s Australian economic releases were mixed with Q3 business inventories up 0.8%, Q3 company profits falling by 2.1%, October private sector credit unchanged and October new-home sales declined by 6%. The direction of equity markets and commodities remain key to the AUD. Focus turns to the RBA policy meeting Tuesday.

On December 1st October building approvals will be released expected at 1.5% compared to 2.7% last month. On December 3rd October retail trade will be released expected at 0.6% compared to -0.2% last month.

The technical outlook for the AUD is positive as the AUD rises to above 9000. Expect AUD support at 8946 the November 27th low with resistance at 9325 the November 26th high.

By Michael J. Malpede

Easy Forex

Michael J. Malpede is Chief Market Analyst with Easy-Forex® and has previously been featured on Bloomberg TV, Bloomberg radio, Reuters, MarketWatch, Wall Street Journal, Chicago Tribune, Chicago Sun Times, Toronto Star and Nikkei press. In analyzing the markets, he draws from 29 years of Foreign Exchange Research as a Foreign Exchange Analyst.

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