The full brunt of U.S. traders are back in their offices and judging from the price action in the currency and equity markets, they are not entirely convinced that Dubai's problems will end up troubling the world. Yes, Dubai is a major global player but the British have much more to worry about than the Americans. Of the UAE's total cross border banking exposure, European banks hold 72 percent and 41 percent of that is with the U.K. U.S. and Japanese exposure only amounts to 9 and 7 percent of the total flow. This explains why the British pound is the only high beta currency that is not rising against the U.S. dollar this morning. For the most part, it appears that currency and equity traders have shrugged off the news. Although we believe that an all out default of Dubai's sovereign debt is not an immediate risk and the situation is not nearly as grave as some people make it out to be, it is still unfolding. Fundamentals still support further dollar weakness but we caution traders against taking large positions.
Risk appetite is also benefiting from positive U.S. economic data. Chicago PMI rose to 56.1 from 54.2, the highest level since August 2008. Earlier this month, there was a bit of confusion about how the U.S. manufacturing sector is performing. Conditions deteriorated in the NY region but improved in Philadelphia. We now know that the sector continues to expand in the Chicago region which suggests that the national ISM manufacturing index may have also risen in the month of November. All but one of the underlying components (production) increased, with the employment component of Chicago PMI rising from 38.3 to 41.9.
Canada: Low Inflation and Strong Growth
Aside from the Chicago PMI report, one of the more important economic releases this morning were Canada's GDP and inflation reports. The Canadian economy grew 0.4 percent in the third quarter with a similar degree of growth in September. The Q2 data was also revised higher from an annualized rate of -3.4 to -3.2 percent. In other words, Canada, like many other countries around the world came out of recession in the third quarter. The latest industrial product and raw material price figures were mixed with the former falling 0.3 percent and the latter rising 2.5 percent. Relatively low inflation levels and positive growth reflects the improvements in the Canadian economy. However the Canadian dollar has struggled to rise since growth in Q3 fell short of the market's 1.0 percent forecast. There are no additional reports from Canada until Friday, when employment numbers and IVEY PMI are due for release.
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