Business and financial news are still heavily dominated by the Dubai credit problems. However, as the time was passing on Friday, currencies and other financial markets stabilized, as if the news was not really such a great shock as it originally had appeared. And it shouldn’t have been. After all, Dubai World, state owned company in charge of real estate development, had already been bailed out once before. That happened in late February, early March this year. Evidently that was not enough. It is possible that they will have to sell some of their assets, in order to meet debt obligations. This option has already been floated, and rejected, before. Perhaps now it will become a more viable alternative. One should expect the Dubai related news to be on hot seat for some time now, with currencies being responsive to them.

For the time being, though, slow down could be in order. Parties involved will be seeking a resolution there with many proposals about what to do flying back and forth. It will take days, even weeks before more clear picture emerges. But this whole situation demonstrates that the so called global “recovery” is not as complete, or solid, as many would like us to believe. For what we know, there are more borrowers like Dubai, which will not be able to meet their obligations. I’m sure that markets will remain responsive to these type of announcements even if financial officials are downplaying, or ignoring, their importance.

Commodity currencies  proved to be particularly vulnerable to this development, something that is likely to continue. All their crosses had sharp adverse moves, which were correcting on Friday. Over last few weeks I used NZD-JPY as an example of these pairs, looking for a move down. Price fell hard through 63.00 support, but bounced strongly from 60.00 level.

The way price behaved on Friday reminds me of the all the sell offs in Yen pairs over last few years. If this is true, it should move back up now, for probably few weeks, in a slower manner and then fall again and retest the new low. On daily chart it means going back to 63.00-65.00 range, before resuming down trend. Strong bearish reversal pattern could be entry signal for short trade. Right now selling this pair on daily time frame is not very attractive, without strong stop/loss area close by.

Intermediate term chart could be better to follow. I would expect volatility to diminish for a while now, with movements slowing down over next few days. First important resistance would come at 63.00 and one of the possibilities is for the price to form a type of rounded top. While on daily chart single candle reversal formation might be enough to sell it again, here I will be looking for a more complex pattern, creating and then breaking minor lows. This would involve several candles over 1-3 day period. We’ll see.

No guarantee any bounce will take place, of course. For what we know more “surprising” fundamental data can be unleashed on us any time. Another one of commodity currencies could be attractive , AUD-JPY. This pair has just stopped at 76.30, or so, creating set up very similar Kiwi-Yen before it fell through 63.00. Here this could be worth 350-400 pips in a short time, if the sell off goes on. But in general, I think that prices will rise somewhat before next major swing down. That’s what smaller time frames, like 1H charts, of all Yen pairs suggest.

Few days ago I had couple of GBP-CHF trades using hourly chart. Price tried to turn around, but the upside breakout failed. I want to try it again on the same time frame. Order was placed at 1.6637, with objective of 110 pips or so.
This being Sunday, gaps are always possible at the open, something to pay attention to. A thought about Japanese Yen- it just made 14 years high against US Dollar. I would expect Japanese financial officials to start rattling the saber a little bit. For a long time now they have been “comfortable with orderly moves in foreign exchange”. It will probably change in near term, with first hints, and then threats of interventions. I doubt current levels are still “comfortable”.

Mike K.