TRADING SCENARIO: The risk trade was the focus of activity on Monday. An early perspective that the Dubai World debacle was running its course gave way to second thoughts that the problem might be blowing over quickly. When forex traders don't know what to do, they often revert to the equity correlation trade and that is what they do. Equities recovered and the EURUSD reluctantly followed stocks higher.

We indicated earlier today that the aftermath of the Dubai World debacle could extend into the end of year period. We don't think that concerns are going to spread to emerging market debt, and that there will be major repercussions for confidence in the stability of major financial institutions. Someone said today that this could turn out just to have been a storm and not the hurricane many had feared.

Nevertheless, he episode has impacted the markets because a number of stop losses have already been triggered in risk trades and this is now likely to shorten the time horizon and risk tolerance of many traders. Our best guess is that markets will continue to be active in the ramp up to the end of year period, but that traders will be playing their risk trades closer to the vest. One has to wonder if the gold trade and some of the short USD trades are over-populated?

One important focus may be the long JPY trade, which has been fueled by capital reparations. The new rather naive Japanese government has had a number of conflicting things to say about the JPY. Reluctantly they seem to be coming around to the view the currency may have to be contained, but also seem to be admitting that they lack the necessary tools. We note also that the BOJ seems to have taken a more conciliatory posture.

EQUITIES & INTEREST RATES

FOREX

EUR/USD is ending well off its highs. The equity correlation trade has been working. The EUR is up on its major crosses.

EUR/CHF is steady. USD/CHF is steady. EUR/CHF 1.50-1.53 SNB band. SNB forex policy may be in flux.

USD/JPY is higher, and the EUR/JPY is sharply better. Mixed signals on Japanese forex policy continue. The government vs. BOJ struggle might become an issue.

GBP/USD is higher. EUR/GBP is steady. Mixed data have been triggering GBP instability. BOE King recently indicated that a weaker GBP could contribute positively to U.K. economy.

COMMODITIES and Commodity Currencies

The CAD is weaker as the risk trade is out of fashion now.

The AUD and NZD are better. Risk trades keep cycling in and out of fashion. The RBA is on offense heading into its December rate decision after strong October employment data. A +25bp rate hike is expected later in Australia.

Gold and Oil are mixed. Gold, oil, equities and the commodity currencies are all carry trades vs. USD. Gold is another anti-dollar.