Will Dubai's Standstill Spark a Reversal in the Dollar?

In my last post I indicated that the US Dollar was poised to rally because of excessive bearish sentiment. Many market analysts had opined that the stage was set for a USD rally but any USD reversal needed a spark such as a geopolitical event.

We may have seen that spark. The world awoke Thursday morning to the surprise news of the potential default by Dubai World.

As FT Alphaville puts it [emphasis mine]:

Dubai’s government stunned the debt markets on Wednesday by asking for a 6-month standstill on the debts of its flagship holding company Dubai World.

The shock move came just hours after the Government of Dubai raised $5bn via a bond issue, the proceeds of which traders had rather naively assumed would be used to pay back a loan issued by Nakheel, Dubai World’s property arm.

This may seem like a stupid and naïve question, but how can someone ask for a debt standstill just hours after raising a bond issue without some disclosure in the prospectus document?

Overnight the markets have moved from euphoria over the prospect of a V-shaped recovery to despair over a potential sovereign default. Get ready for Extremistan.

Comments

[untrusting investor]

Yes, it looks pretty ugly with US futures pointing to big sell-off. Oil, gold, silver, etc down 5%+ late on Sunday evening. Sell-offs in equities in Asia and Europe looking not very good. If the short covering on dollar shorts get rolling, it could well be a pretty nasty sell-off for awhile now. And if fear picks up, it could make for even more of a nasty correction. Will be interesting to see how this plays out Friday and the following week.

2009 Nov 27 03:25 AM

[Gary A]

It all comes back to the US consumer. Bush and Greenspan and now Obama and Geithner can steal and steal with ponzi loans and bailouts. But this is all an attack on the true engine of world growth, the US consumer. Kill him and you kill the world economy.

Massive short squeeze on the dollar could happen. This could be a massive unwind predicted by Roubini.

2009 Nov 27 03:48 AM

[Davewmart]

At some stage something was bound to give somewhere.
This fake rally is built on sand, just like Dubai.
Check out the rise in the already high Yen.
Volatility is approaching levels where the system simply can't function.

2009 Nov 27 04:56 AM

[TraderRob]

Breaking down the situation and looking at the recently unfolded events from an analytical standpoint, we must admit that the Dubai World debt extension is effectively a default. As described in an FT opinion piece on the matter, Dubai is a "vacuum"-like atmosphere of "top down" decision making, offering little more than government level talk to the strengths of the Arab developers such as Nakheel (firm responsible for the ostentatious man-made palm island real estate venture) when investors had requested reassurance.

The default is essentially a default by the Dubai government, since they have guaranteed all debts of the fund, and implies weakness throughout the Arab economies and perhaps the world. Implicit repercussions will be felt by all Middle East business, not the least of which include major risk taking firms such as Emirates airline, which has made broad plans to expand their fleet of new jets.

The situation completely discredits Middle East borrowers and calls in to question the ability of nations throughout the world who have rushed to the table to borrow on recently lower rates.

Perhaps this will be just the event necessary for credit and equity markets to snap out of the stimulus illusion and into reality.

For more global analysis see:
diamondslice.typepad.c.../

2009 Nov 27 06:44 AM

[uhuh]

There is more to the spark than Dubai . Remember the Vietnamese currency (the dong) Is under going a rapid devaluation . Couple that fact with Japans deflationary train wreck coming and we have some potential bad currency risks in the fx markets.The temporary rise in the dollar is only logical.This could be a ploy by Vietnam to gain market share in their exports and could spark a massive Asian currency devaluation with Japan and other central banks intervening in the devaluation process.

2009 Nov 27 07:09 AM

[Djvu]

no way USD is gonna strength last long. 20 DMA is 1.4875 & 50 DMA of 1.48 hasnt been breached by far.
This could be a ploy by Dubai and Helicopter Ben to ensure dollar`s reserve currency status..lol

2009 Nov 27 08:11 AM

[tinscale]

This is about the 3rd reference I've seen in various articles to "Sunday evening." I guess the Thursday Thanksgiving holiday in the US is confusing a lot of people, or else they are really stressed out!

On Nov 27 03:25 AM untrusting investor wrote:

> Yes, it looks pretty ugly with US futures pointing to big sell-off.
> Oil, gold, silver, etc down 5%+ late on Sunday evening. Sell-offs
> in equities in Asia and Europe looking not very good. If the short
> covering on dollar shorts get rolling, it could well be a pretty
> nasty sell-off for awhile now. And if fear picks up, it could make
> for even more of a nasty correction. Will be interesting to see how
> this plays out Friday and the following week.

2009 Nov 27 08:41 AM

[derryl]

In answer to the question posed in the title of Cam's article I say, yes, the Dubai issue will spook the markets and initiate a short term pullback where the dollar will temporarily turn higher. This will lead to short covering on overleveraged US$ carry trade investments which will have a negative impact on whatever markets the carry trade is invested in. But the carry trade is not big enough to generate a systemic event. This will be a dip followed by a return to trend. The dip will overshoot to the downside which will induce sideliners who have been waiting for an opportunity to join the rally to jump in. I'm not saying any of this is rational, but it's becoming clearer that market behavior is about 3 parts emotion and 1 part reason.

2009 Nov 27 09:47 AM

[Novice6]

Agree strongly.

On Nov 27 09:47 AM derryl wrote:
> In answer to the question posed in the title of Cam's article I say,
> yes, the Dubai issue will spook the markets and initiate a short
> term pullback where the dollar will temporarily turn higher...

2009 Nov 27 10:01 AM

[thotdoc]

That's why the book was entitled the Madness of crowds. And why technical analysis may not be particularly helpful at this juncture.


On Nov 27 09:47 AM derryl wrote:

> In answer to the question posed in the title of Cam's article I say,
> yes, the Dubai issue will spook the markets and initiate a short
> term pullback where the dollar will temporarily turn higher. This
> will lead to short covering on overleveraged US$ carry trade investments
> which will have a negative impact on whatever markets the carry trade
> is invested in. But the carry trade is not big enough to generate
> a systemic event. This will be a dip followed by a return to trend.
> The dip will overshoot to the downside which will induce sideliners
> who have been waiting for an opportunity to join the rally to jump
> in. I'm not saying any of this is rational, but it's becoming clearer
> that market behavior is about 3 parts emotion and 1 part reason.

2009 Nov 27 12:17 PM

[Options Trading]

This is why people like me don't put on new positions before extended holidays.

2009 Nov 27 08:55 PM

[Moon Kil Woong]

The government of Dubai is not Dubai world the same way Fannie Mae and Freddie Mac were not the US government. The fact that people, especially those marketing their bonds don't distinguish or acknowledge this fact and creditors overlook it is a grave mistake. The simple fact is, no government should explicitly or implicitly guarantee any private entity. Each and everytime that entity will abue it's power and stick that government with the clean-up cost.

Dubai's new government is right in saying it will not let the crony capitalism that is sinking it go on and on. The powers that be are not happy with that decision, but what should they do. Cover their eyes and play see no evil hear no evil? If you think What Dubai did was really that bad, you should look at what the US is doing? The case of Fannie Mae, Freddie Mac, AIG, and the too big to fail banks are only dissimilar die to the fact that our problem does not number in the tens of billions of dollars but trillions.

2009 Nov 27 10:30 PM

[JimmyUSA]

Thanks for the article Cam, but for the last +6 months I been hearing/reading that the very oversold Dollar is is due for a big reversal and the very overbought global stock market is due for a big reversal. Fortunately for me, using the right TA tools I been selling at short term highs (like last week) and buying short term lows (which probably be a week from now.) Each month at least one short term lows or highs. Eventually I'll catch the intermediate term trend reversal, thus far it haven't occurred since early March.

2009 Nov 28 01:21 AM

[idx1]

Lets just have a look at the weekly MACD histograms for USD and SPX

SPX:
stockcharts.com/h-sc/u...

USD:
stockcharts.com/h-sc/u...

Euro:
stockcharts.com/h-sc/u...

Risk reward definately favours the bears at this point.. With such technicals I very much doubt we will see a rally higher any time soon... The scene looks set for major December correction if you look at the charts..

So I do agree with the author, although more from a technical perspective that we will see a spike in the dollar in the weeks ahead and a selloff in the equities.

Even if this is shortlived, it is just round the corner. The seeds of doubt in the market are now there, and the bears are coming out to play very soon... isclosure: Short SPX, Short EUR/USD

2009 Nov 28 05:00 AM

[Stephen12345]

I think this is temporary for the $ as it will fall again after the market become calm from this storm.

2009 Nov 28 10:17 AM

[Djvu]

hah me have contra view. on such holidays one just need slight negative news for markets to tumble. I was short 3 days ago , I had bought the highest ever puts in my life. sold up 2x on dubai news. shweet


On Nov 27 08:55 PM Options Trading wrote:

> This is why people like me don't put on new positions before extended
> holidays.

2009 Nov 28 10:34 AM

[gregm]

USD will appreciate near term given its historical role as a safe haven asset, however, fundamentals will push dollar right back down as shock passes.This offers an opportunity to short USD on spike, I hate to say it but the dollar sick.

2009 Nov 29 06:45 PM