Market Rumours

EUR/USD is one cent up from its 1.4827 lows but looking toppish, says a trader. He feels if it can't break back above 1.4950 soon momentum will falter and it will head back down towards the day's lows. He favors selling at market with a stop and reverse above 1.4960, taking profit just ahead of the U.S. open or around 1.4840, whichever comes first. EUR/USD now at 1.4912.

Sterling strengthens across the board Friday after taking a severe battering during the Asia session. GBP/USD trades back above 1.64 from a low of 1.6272, EUR/GBP is down at 0.9075 from 0.9133 and GBP/JPY is up over 200 sen to 142.00. A recovery in risk appetite has helped as gold regains $20/oz and European stocks head back toward flat on the session. However, with the UK horribly exposed to Dubai World's debt, the risk currencies fast losing favor with a jittery FX market and news that UK chancellor Darling is likely to cut his 2009 GDP forecast it has to be asked how long sterling's recovery will last.

Flummoxed by forex--that's how Japan's new finance minister must be feeling.At 14-year high against the dollar, causing shares of exporters like Sony and Honda Motor to drop and stoking fears of imported deflation, the yen is testing the tolerance of Japan's Finance Minister Hirohisa Fujii. Just two months ago he said he's reluctant to intervene in foreign exchange markets.On Friday, Fujii changed his tune somewhat, lamenting the "one-sided" yen appreciation. It was his strongest jawboning yet, but this is still a long distance from actual intervention, on balance something the empirical argument remains against.For starters, Japanese authorities pay close attention to volatility in the currency market. Despite the recent moves, the currency options market continues to signal only modest turbulence for the dollar-yen exchange rate ahead, with implied volatility still near half the level it reached as the yen spiked in the aftermath of the Lehman Brothers collapse. The government didn't intervene back then.Second, because Japan's been without meaningful inflation since 1995--the last time the dollar-yen exchange rate was at current levels--its exporters are better able to tolerate a stronger currency. It currently takes about 86 yen to buy a dollar. Until it takes only 55 the impact of the strong currency won't be the same as it was at the historic high 14 years ago, Macquarie Research says.

Asian stock markets slumped Friday with some suffering their worst losses in months amid concerns about the potential fallout from Dubai World's debt standstill, with bank and construction stocks leading decliners. Gold and oil prices fell, as did currencies viewed as riskier bets. The Australian dollar went under US$0.90 while the Japanese yen--viewed more as a safe-haven currency--briefly hit another 14-year high against the U.S. dollar, a move which hurt shares of exporters in Tokyo. "Year-end window dressing has taken a rather nasty turn, with risk being furiously sold as sentiment soured sharply," said David Watt, Senior Currency Strategist at RBC Capital Markets Patrick Bennett, Asia rates strategist at Societe Generale added: "Fallout from Dubai World seeking a debt moratorium has been broad. It is not the amount involved but potential contagion that will drive markets." Japan's Nikkei 225 Average fell 3.2% to 9081.52, its lowest close since July, while Australia's S&P/ASX 200 ended down 2.9%, South Korea's Kospi dropped 4.7% and Taiwan's Taiex gave up 3.2%. Hong Kong's Hang Seng Index dropped 4.8% and China's Shanghai Composite lost 2.4%, while India's Sensex was down 2.8%. Markets in Singapore, Malaysia and Indonesia were shut for a holiday. Asian markets were tracking the declines made Thursday in Europe after Dubai World, the city state's largest corporate entity, asked creditors for a six-month standstill on debt repayments of $59 billion. Markets were also volatile after the U.S. market holiday Thursday, with Dow Jones Industrial Average futures recently 297 points lower in screen trade. Financials across the region took a hit amid concerns about banks' potential exposure to Dubai World's debt, and other debt issued in Dubai more generally. Major banks in Australia were down sharply, with National Australia Bank off 4% and Westpac Banking Corp. down 3.8%. In Hong Kong, HSBC and Standard Chartered both fell 7.4%. In Seoul, Shinhan Financial was down 6.3%, while ICICI Bank shed 5.7% in Mumbai. That's even as banks in Asia said their exposure to Dubai--if any--was mostly small, and some analysts said markets were using the Dubai news just as an excuse to sell into gains."At the end of the day, we're talking about Dubai here. Yes, some of the big European and U.S. banks are likely to have exposure but it's unlikely to 'sink the boat' so to speak, especially given what financials have been through over the last 18 months," said Ben Potter, research analyst at IG Markets. Construction stocks were also caught up in the selling, with Japan's Taisei down 7.1% and Obayashi tumbling 8.7%. In India, Larsen & Toubro was down 4.2%, Jaiprakash Associates down 3.9% and Punj Lloyd off 4.0%. Japanese exporter stocks were weaker as the yen gained, with Honda Motor down 3.8%, Sony down 4.4% and Canon off 2.7%. The greenback went below Y86 in early trade and hit a 14-year low of Y84.82, before recovering some ground to be near Y86.40. Mizuho Securities market analyst Yukio Takahashi said many Japanese exporters have based their earnings outlooks on the assumption of the U.S. dollar at Y90, with a few conservative firms basing theirs on Y85. Japan's finance minister Hirohisa Fujii stepped up his rhetoric against excessive yen rises, calling the currency's recent climb "one-sided." Still, Societe Generale's Bennett said currency market intervention from Japan was off the cards for now. "Japanese official comments have been prominent on the newswires and while more specific in tone than the last couple of days, we would still expect some ratcheting higher in tone before physical action is taken." Elsewhere in currency markets, the euro was at $1.4855, from $1.5009 late in Toronto Thursday, and at Y128.29, from Y129.74. Resource stocks were taking a hit as the general pullback from risk sent commodity prices lower. Rio Tinto was down 3% and BHP Billiton off 3.4% in Sydney. In Tokyo, Sumitomo Metal Mining fell 6.3% and Aluminum Corp. of China sank 5.9%. Spot gold was recently at $1,144.60, down $47.50 a troy ounce from the London afternoon fixing. Front-month Nymex crude oil futures dropped $5.01 on Globex to $72.95 a barrel. Lead December Japanese government bond futures were higher on the stronger yen. Futures gained 0.32 to 139.82 points with the 10-year cash JGB yield down 3.5 basis points at 1.245%.

Japanese consumer spending sputtered and deflation remained entrenched in Japan last month, underscoring weakness in the economy as Tokyo grapples with a surge in the yen to 14-year highs that could hinder support from its export industries. The jobless rate fell to 5.1% in October from 5.3% a month earlier, the government said Friday, but economists brushed aside that upbeat sign, warning that consumer appetite could fade as public stimulus begins to taper and hard-hit companies pare bonuses to reduce costs. The core consumer price index fell 2.2% on year in October, the Ministry of Internal Affairs and Communications said. That matched a 2.2% drop forecast by economists polled by Dow Jones Newswires and Nikkei. The core index figure, which excludes volatile prices for fresh food, decreased for the eighth straight month, following a 2.3% slide in September. The pace of decline slowed for a second month in a row, but the data add to other evidence that deflation in Japan may persist over the next few years.

Barclays Capital says ongoing quick unwinding in risk trades should be contained by policymakers before it becomes Lehman Brothers-like mess, but may cause some damage in the meantime. Notes concerns about Dubai World's debt payment freeze, "and to a lesser extent Vietnam", so far resulting in classic risk-off configuration - with JPY, USD as best performers, AUD, ZAR and NZD the worst, and EUR also under pressure. "The key question is whether this will be a replay of 4Q 2008 or be a shorter, more benign correction. The key difference between now and then is that policymakers are much more on guard...now the odds are likely that they will respond forcefully to prevent an extended period of market disruption."

Jeeson Augustine's Notes on yesterday's "THIN TRADING vs Massive destruction"Dubai World’s surprise request for a freeze on debt payments provided the focus for world financial markets yesterday, hitting bank stocks and the price of oil, but lifting the dollar on a day when US and most Gulf markets were closed.With the US on holiday for Thanksgiving, the region observing Eid al Adha, and trading on the London Stock Exchange temporarily closed for technical reasons, the environment was ripe for rumour and sensation as markets eschewed risk for gold and US dollars.The day began with credit ratings agencies downgrading several government-related companies, such as DIFC Investments and Emaar, citing questions over Government support. Gold, a traditional refuge for investors in a storm, hit a record high of nearly US$1,200 before falling back.Dubai then issued a statement to the market clarifying that DP World, the profitable ports division of Dubai World, would be spared from a restructuring that was announced along with the debt freeze request.The announcement regarding DP World was welcomed by markets and within the company itself. “This makes perfect sense. We have very tradable assets and a very attractive business,” a DP World executive said, speaking on condition of anonymity.Still, markets added a premium to the cost of borrowing for Gulf companies, and the price of insuring government debt against default also rose. European stock markets had their biggest falls in three weeks, while the MSCI index of emerging stock markets declined by one per cent.The government late Wednesday said it would restructure Dubai World and announced a six-month "standstill" on repayments of the state-run wide-ranging conglomerate's debt. Government-owned Dubai World is a conglomerate with interests in real estate, ports and the leisure industry. The firm carries around $60 billion in liabilities. Credit agencies Moody's Investors Service and Standard & Poor's downgraded the debt of a range of government-related firms, including DP World, after the restructuring announcement.This resulted in GBP14 billion wiped off value of UK banks.

Volatilities implied by 1-month ATM USD/JPY options mark 7-week high at 13.90%/14.60% from 11.10%/11.80% in Tokyo yesterday; spot slide to fresh 14-year low at 84.82 fuels demand for hedges against further falls. If any materialize later in global day, vols may rise by another percentage point by early next week as investors bargain hunt USD-put options, still at relatively low levels, dealers say.

Standard Chartered says USD/JPY declines have come amid thin liquidity, with short-term momentum indicators mixed, weekly charts still bearish. Notes that, looking at JPY real effective exchange rate and JPY nominal effective exchange rate, yen is nowhere near its highs of January and February 2009; "at that time, the BOJ chose not to intervene in the currency market even though the yen REER and NEER were higher than in 2003-04, when the BOJ last intervened. The speed of the appreciation may be the key cause of concern." Fundamentally, house is neutral on JPY; "investor repatriation is likely to remain relatively strong ahead of the fiscal year-end in March 2010, but growth prospects and valuation are medium-term concerns."

USD/JPY's earlier drop to 14-year low at 84.82 was not related to fundamentals - it was due to "the pair breaching levels where there were lots of stop-loss selling orders," says Daisuke Karakama, market economist at Mizuho Corporate Bank; "we saw this from earlier in the week at 88, then 87 and today at 86." While FOMC minutes released Tuesday weighed on USD by suggesting Fed not unduly concerned with weak USD, likely to maintain ultra-low rates for foreseeable future, pace of USD/JPY falls thereafter stemmed from technical factors; "for that reason, the kind of bounces like we're seeing this morning (with the pair now at 86.04) could persist." But adds while some concern over intervention partially behind pair's rebound, comments from Japan finance minister Fujii, other officials "have maintained a relatively even tone from yesterday"; that's leading some to speculate any intervention would only come with much sharper USD/JPY fall.