The week ahead – Abu Dhabi’s helping hand and questions on the dollar

The last full trading week of this year started with an unexpected boost from the Abu Dhabi’s bailout of its neighbor.

The last full trading week of this year started with an unexpected boost from the Abu Dhabi’s bailout of its neighbor. The rest of the week is about to be as interesting with plenty of macroeconomic figures on both sides of the Atlantic and central bank meeting in the US and Japan. The bulls on stock markets get their chance to lift indices to the new highs while the situation on the EURUSD is much more questionable.

This is yet another bailout of the latest financial crisis. Abu Dhabi was reluctant to help Dubai (again) with its debt problems and it had plenty of reasons for it. Far more conservative, with assets rather than debt, Abu Dhabi could perceive Dubai’s problems as a well deserved punishment for its sins. But while right in moral terms, such an approach would be damaging not only to Dubai but to the whole region, including Abu Dhabi. So the emirate decided on the last minute bailout (a large bond of Nakheel, Dubai World owned developer is to be paid back today) and spurred optimism on the global markets.

The decision itself might not be a key factor in the longer perspective but it might serve as a trigger for the global markets. In the last two weeks investors on the major stock markets were unable to push indices higher despite very bullish data from the US (payrolls, retail sales). However, technically we are still in the rising trend on the S&P500 and a positive impulse on a Monday might be a prelude for a larger gain on this generally solid fundamental picture.

While stocks seem to be well positioned for the remaining part of this year, there are many more questions regarding the EURUSD and the dollar in general. From the technical point of view, a recent sellout on the pair may well be classified as a correction. Actually it resembles a similar move in June, after which the pair went in a relatively smooth mode from 1,3740 to a recent high of 1,5143. The problem lays not in a scale but in a manner of a recent retracement. The two strongest impulses came after very strong macroeconomic reports from the US which so far usually generated bullish impulses on EURUSD, stock markets and typically USDJPY too. A parallel slide on all of those markets could suggest a typical profit taking on the idea that these figures are priced and a lost momentum is a good opportunity to take some profits from the table. However, as the EURUSD tumbled, USDJPY went up (suggesting a broad squaring of short dollar positions) and stock markets moved sideways. Moreover, while rates expectations in the US are still tempered, FRAs reacted fiercely to both payrolls and retail sales reports. If that suggests a reversal in a reaction on the dollar to the US macroeconomic figures, a trend of on the EURUSD is in a peril. A possible reversal on the EURUSD would have far reaching consequences. A halt of dollar’s depreciation would hurt not only commodities and emerging currencies but possibly also stocks.

Therefore it will be extremely interesting to see the dollar’s reaction to macroeconomic reports due this week (output on Tuesday, housing data on Wednesday, regional activity indices on Tuesday and Thursday) and an impact of the Fed statement due on Wednesday. While we expect the Fed to keep the statement virtually unchanged, it might no longer be a guarantee for a slide in a value of the US currency.