News that a property development arm of Dubai World requested to delay its payments triggered sharp volatility across the financial markets. The story actually broke on the eve of November 25th and on the 26th , currency traders began to flock into the safety of U.S. dollars. The demand for dollars was so strong that the euro hit an intraday low of 1.4829 when the European markets opened. The price action in USD/JPY tells us that risk aversion was the primary driver of the forex markets as USD/JPY fell to a 14 year low when the Asian markets opened last night. However the selling did not continue into the U.S. trading session. The limited number of U.S. traders at work today sold rather than bought dollars which suggests that not everyone believes that the Dubai news will have global ramifications. Whether this is true or not remains to be seen but whenever there is a situation where traders are unsure about how the political or economic environment will pan out, such as Dubai's woes, they always sell first and ask questions later. As a result, the USD and JPY were the biggest beneficiaries.
Understanding Dubai’s Problems
A major exogenous risk like the Dubai news is one of the few things that can trigger a bottom in the U.S. dollar as the greenback's safe haven status overrides U.S. fundamentals. On the eve of November 25th, the Thanksgiving Holiday in the U.S. and the Eid Holiday in the Middle East, Dubai World shocked the markets by saying that its property developer Nakheel has requested to delay its Dec 14 debt payments. Dubai World is not technically owned by the Dubai government, but with liabilities of US$59 billion, it is a significant amount of the total estimated US$80-100 billion in Dubai's liabilities. As a result, investors fear that this could mean an outright default on Nakheel's debt as delinquency is usually the precursor default. Although the market has clearly not taken this news well and believes that it is a major development for the global economy, it is important to realize that Nakheel's debt is only $3.52 billion, a fraction of Dubai World's overall debt. Also, U.S. and European banks have very small exposure to Nakheel’s debt. Granted a default may entitle investors to some of Dubai World's assets, H.H Sheikh Ahmed bin Saeed Al-Maktoum, Chairman of the Supreme Fiscal Committee, has already issued a statement confirming the Dubai Government's intention to directly intervene and manage the restructuring of Dubai World commercial operations and its debt obligations. Although some people are afraid that this could turn into an Argentina style debt default or a repeat of volatility of Q4 2008, what is more worrisome is the fact that this may be indicative of the health of the entire property sector in the Middle East.
Comments
The news was timed for release perfectly, Eid Holiday in the muslim world and US thanksgiving holiday.......in order to minimise the sell off.
got to hand it to them , they know how to manipulate the system
thanks