Dubai Debt Concerns Moderate

Despite the 6% slump in Dubai equity indices in early trading, global markets have shrugged off concerns surrounding the debt crisis with remarkable ease, and risk appetite has begun the week on a strong footing with most Asian equity indices strongly higher. The remedy for the most recent bout of risk aversion has been an announcement from the UAE central bank asserting they would stand behind local and foreign banks operating in the region, to ensure ample liquidity is available. It was never a doubt in our mind that the oil-rich Abu Dhabi emirate would have little difficulty covering debt obligations that ran to a trifling USD 60bn; but what has been surprising is that the undercurrent of doubt about sovereign debt ratings has been disregarded so quickly. After all, it is not just Dubai where the cracks are beginning to show; concerns over the gloomy outlook for Ireland and Greece’s debt burden have also been simmering of late, and the soaring level of sovereign CDS premiums makes for uncomfortable reading. Nevertheless, overnight news that India’s GDP grew faster than expected in Q3 have boosted sentiment that the BRIC economies continue to power forward out of the recession and drive global demand higher.   FX markets look to have stabilized from the choppy price action seen at the end of last week, and now that the ranges have been cleared of stops, we expect a period of consolidation before a confirmation of prior USD break outs. There are some notable economic releases due in the week ahead, starting with Canadian Q3 GDP later in today’s session which is expected to show a 1.0% annualized pace of expansion after Q2’s -3.4% reading. Given the interest that Russia has shown in diversifying its reserves into CAD going forward and Friday’s USDCAD corrective rally unable to challenge 1.0800 resistance, it seems there is plenty of scope for renewed CAD strength if this number beats forecasts. Tuesday’s schedule kicks off with the RBA rate decision where it is anticipated that a further 25bps of tightening will be approved, bringing the headline rate to 3.75%. Although we too are in line with the majority of forecasters in predicting a hike, clearly the balance of risks lie to the downside as an on-hold decision would be a stark surprise to markets, and AUDUSD is already under pressure going into the year end with profit-taking leading to liquidation of cross-AUD trades. Following up the rate decision, Australia Retail Sales are due on Thursday and are expected to show a 0.3% MoM increase after September’s -0.2% decline.   This will also be an important week for Eurozone data; with Unemployment data and Manufacturing PMIs expected on Tuesday; then Retail Sales, Q3 GDP and the ECB rate decision Thursday. These releases will undoubtedly influence the direction of EURUSD within its range, but sustained moves will rely heavily on the broader direction of risk appetite and the confirmation of break-outs from a technical perspective.

Today's Key Issues (time in GMT):
10:00 EUR E16: Flash HICP, % y/y Nov exp: 0.4 prev: -0.1
13:30 CAD GDP, % q/q Q3 exp: 1.0 prev: -3.4 14:45 USD Chicago Purchasing Managers Index Nov exp: 53.3 prev: 54.2

The Risk Today:

EurUsd The rangebound action continues with bids at 1.4815 support and offers above 1.5000. A break above 1.5060 obviously targets the 52 week high of 1.51445 and I would not give much credit to the ascending triangle until we see a daily close above those levels. The daily divergence is still an issue so for the short term we may well see intraday shorts at 1.5050 / 60 with stops just above, looking for a quick 50 pips back down to 1.4994. 

GbpUsd Once again cable is forming a massive compounded head and shoulders with 1.6272 as a neckline and 1.6663 as the top of the second shoulder. Core sterling shorts are likely to be considering the newly formed downtrend channels and this compound H&S as a very good medium term risk reward scenario so look for signs of weakness slightly before at 1.6618 and at the upper downtrend channel which is also at 1.6663. 

UsdJpy Only two ways to play USDJPY longs today as we have the lower daily downtrend channel at 84.96 where we would likely see some short covering. Below there we have the steeper 4 hourly downtrend channel at 84.46. For the short side I would be paying attention to the much steeper 1 hourly downtrend channel which comes in at 86.70 and only a break and hourly close above 87.10 would negate this powerful short term downtrend. 

UsdChf Last week’s low of 0.9937 should provide a good floor this week as it was the target from the channel breakdown and unfortunately I failed to see it or mention it. Prior to that level we have a decent bit of support building at 0.9993 but 1.0186 will likely cap this pair until some further bad news in risk assets rears it’s ugly head. Intraday players may well be looking at 1.0080 as a decent short entry level with stops above 1.0110. 

Resistance and Support

EURUSD
GBPUSD
USDJPY
USDCHF

1.5100
1.6900
91.50
1.0360

1.5062
1.6880
90.05
1.0290

1.5046
1.6840
89.10
1.0200

1.4936
1.6519
88.61
1.0118

1.4800
1.6460
88.60
1.0076

1.4700
1.6272
88.00
1.0037

1.4626
1.6240
87.15
0.9890

S: Strong, M: Minor, T: Trendline, K: Keylevel, P: Pivot