Forex Worries About Dubai and Thin Liquidity Hurts Risk Correlated Trades

Concerns over Dubai World quasi-sovereign debt restructuring situation was still haunting risk correlated trades in the Asian session. And combined with thin liquidity has made for a volatile Friday. Asian equities markets were lower across the board, with the Hang Seng falling -4.8%. US 10yrs Trsys have gapped down to 3.20%, while Gold is down nearly $50 from Thursday's high. USD has seen invigorated buying, with EURUSD slipping to 1.4828 at the time of writing. The other big gainer, to the alarm of Japanese policy makers, has been the JPY. MoF intervention rhetoric increased significantly and Finance Minister Fujii provided markets his harshest warning yet, saying that "appropriate measures" were now justified as there was "no doubt the market has moved too far in one direction" and current FX moves were “extreme”. He also said that speaking with US and European officials to coordinate an international response would be a possible direction. News wires were citing market sources, which say BoJ was seen in the market checking rates in cross-JPY. The increased interventions risks seem to help, as the USDJPY bounce of the 84.83 low trading up to 86.83. On the economic front, the jobless rate fell unexpectedly from 5.7% in July to 5.5% in August and 5.3% in September while real household spending rose 1.6% y/y in October. While the Dubai story is still evolving, we expect at present, the knee-jerk fear of a systemic collapse are over blown. On the surface, the numbers, while large, are not unmanageable especially given Dubai's close relationship with cash heavy Abu Dhabi. And unlike in 2008, where policy makers were caught off guard, this time they are prepared and would respond with decisive action to prevent an extended market disruption. And in a move to control damage H.H. Sheikh Ahmed bin Saeed Al-Maktoum, Chairman of the Supreme Fiscal Committee, issued a statement yesterday reaffirming / clarifying the Dubai Government's intention to intervene directly and supervise the restructuring of Dubai World's debt obligations. What this event does highlight is the tendency for short term traders to cut positions at a moments concern, making risk correlated rallies very fragile.