US Dollar Retreats as Easing Fears of Dubai Default Boosts Risky Assets

Key Overnight Developments

• Japanese Manufacturing Shows Signs of Weakness as Stimulus Wanes
• Australian Economic Data Sends Mixed Signals Ahead of Rate Decision
• US Dollar Retreats as Easing Fears of Dubai Default Boost Risky Assets

Critical Levels



The Euro and the British Pound both pushed higher in overnight trading, with each currency adding as much as 0.6% against the US Dollar. The greenback retreated against the spectrum of major currencies as stock markets soared after the UAE central bank said that it “stands behind” the country’s local and foreign banks amid last week’s fears of a default in Dubai and loosened the rate at which institutions could borrow from the monetary authority to cushion losses. The MSCI Asia Pacific regional equity benchmark index gained 3.4%.

Asia Session Highlights



Japan’s Nomura/JMMA Purchasing Manager Index fell to 52.3 in November, showing that the pace of growth in the manufacturing sector slowed for the second consecutive month. Meanwhile, October’s Industrial Production readings showed that output grew less than economists expected to add just 0.5% from the previous month. Production fell -15.1% from a year earlier, less than September’s -18.9% decline but more than the -13.4% that had been forecast ahead of the release. Lower output of cars (-0.14%) and electronic parts (-0.2%) led the metric lower. These are Japan’s chief export commodities, so sluggish performance here is a worrying sign of ebbing support from global inventory restocking and fiscal stimulus efforts, which could spell trouble for the nascent recovery in the world’s second-largest economy.

Data out Australia proved to be a mixed bag. The monthly TD Securities Inflation estimate put the annual rate of price growth at 2.1% in November, the highest since April, with TD senior strategist Annette Beacher saying that current interest rates are clearly “too accommodative for an economy clearly outperforming global peers [where] prices appear to have stopped decelerating.” While this surely seems to bolster the case for a third consecutive rate hike when the Reserve Bank of Australia meets tomorrow, other signals seem to suggest otherwise. Indeed, Private Sector Credit grew just 1.1% in October, the least in over 16 years, while the Housing Industry Association (HIA) reported that New Home Sales fell for the second consecutive month in October, this time by a hefty -6.0%. This suggests that lending remains restricted, arguing for (at least) a pause in the RBA’s efforts to unwind what it sees as emergency monetary stimulus. As it stands, a Credit Suisse gauge of priced-in rate hike expectations puts the likelihood of another 25 basis point increase at 64%, the lowest in a week.

In the UK, November’s GfK Consumer Confidence Survey unexpectedly turned sour, showing sentiment declined for the first time since January. While it is surely premature to draw conclusions based on one month of data, the outcome could suggest that rising unemployment (which hit a 13-year high at 7.8% in the third quarter) may be starting to take the forefront as the effects of fiscal stimulus begin to dissipate, feeding concerns about where Europe’s third-largest economy will go from here.

Euro Session: What to Expect



With risky assets riding high heading into the European session as investors, the data docket looks broadly supportive of continued gains. In the UK, Mortgage Approvals are set to rise to the highest level since March 2008, while the pace of decline in Net Consumer Credit is set to moderate for the third consecutive month. Turning to the Continent, the a preliminary estimate of the November’s Euro Zone Consumer Price Index is set to show that the annual pace of inflation returned to positive territory for the first time since April. A return to positive (if modest) price growth is welcome news for the European Central Bank, suggesting the currency bloc may be able to avoid a debilitating period of deflation without implementing additional monetary stimulus measures. However, Germany CPI for the same period proved disappointing last week, creating the distinct possibility that the region as a whole will follow the lead of its largest economy. On balance, equity index futures are trading firmly higher ahead of the opening bell in Europe, hinting that shares will continue to gain in the coming session and put downward pressure on the safety correlated US Dollar and Japanese Yen.


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