Too Good to be True

What a week in the markets we have have seen, regular readers of my blog will know that I have harboured thoughts for a while that the risk trade especially the yen and USD carry trades are over inflated and it was only a matter of time until some of the heat was taken out of them. I don't think for a minute that we will see continued unwinding on a massive scale with Interest rates in the three main zones of the world at record low rates and christmas upon us in a few weeks but you never know.

This week saw every Japanese official remotely connected to the finance department giving doorstep interviews expressing concern over wild fluctuations in the Forex markets as unhelpful, but as a fundamental trader I am pleased for this small correction that we have seen if nothing else it creates fresh opportunities for us, and brings the market one small step closer to where the overall fundamentals believe it should be.

The week also has seen the fairytale that was Dubai come to a crashing halt, with thousands of foreign nationals heading for the first plane out. As the state owned developer Dubai World finally admitted that they don't have enough cash to meet their payments. This could have significant and lasting effects on the forex markets with huge exposure reported by UK and US banks (surprise surprise). We have already seen a fairly agressive selloff in the pound with GBP/JPY reaching as low as 139.70 this action from a pair which the world financial markets already see as hugely undervalued. The US dollar has also seen a lift this week as the inevitable happens when this sort of news come out the flight to safety happens and Yen and USD are bought agressively.

I 'll admit I am no expert when it comes to Dubai but I can't see a short term end to this crisis or how creditors will see any real returns on their investment for a while. Dubai is a member of th United Arab Emirates but unlike its parent Abu Dhabi it has vey small oil reserves so its needs to have tourism and development(growth) to generate income for the state. With real estate prices having fallen some 60% in just months, developers are laying staff off rather than hiring and developments have all but ceased its hard to see them recovering anytime soon gicen the economic climate around the world.

What does this mean for the market, well I am not sure at this stage, after the initial panic and sell off in risk, maybe nothing happens, markets are very thin at this time of year with a lot of the professional money closing down for the year. It is possible in a two year period where there has been so much bad news, so many corporate failures, then maybe this in some way is already priced into market expectations. I feel that its in Abu Dhabi's interest to continue backing some of the bad debt, as a failing Dubai is hardly helpful for their image and continued investment by the west into the Region.

This week when traders come back from thanksgiving holiday we should get some answers. Wall street was sold heavily on Friday but as I say a lot of the main players would of been missing. The Ftse in London after a few terrible days earlier in the week when the news broke, started badly on friday but ended up +51 points up so maybe the markets just see this as another corporate failure in a time of corporate failures.