After weeks of speculations, uncertainty and all out panic, some of Dubai received a lifeline, which could help it save Dubai World, real estate conglomerate which was destined to end up under auctioneer’s hammer.  Dubai officials were unwilling, or not able to, stand behind company’s debt, which created fears around the world about possible default on obligations. This spread far and wide, putting finances of other smaller countries in question. Today, Abu Dhabi, the largest of United Arab Emirates, provided $10 Billion in financing for its indebted smaller brother, which is expected to put Dubai on more sound financial footing. Question is – will it work?

This is not the first time bailout was provided by Abu Dhabi. So far this year emirate poured total of $25 Billion into Dubai, which is believed to owe about $100 Billion, more that its total economic output. A lot of this debt will have to be refinanced over next few years. Many of the projects Dubai world was involved in were structured using short term obligations, rather than longer term loans more suitable for large real estate deals. Unless investment fever strikes again, and soon, value of their holdings will continue to fall, making refinancing difficult. What will happen then? Another bailout? Or will this entire enterprise wash away, like, say, sand islands in the sea? I think we will hear more bad news from that corner of the world.

Currencies responded to bailout news immediately. All Yen pairs shot up by, but the move didn’t last. There was no follow up any gains were wiped out. Currently up trend is resuming in a timid fashion. European banks had the biggest exposure to Dubai and stood to lose the most. Interestingly enough, both Euro and the Pound failed to hold on to earlier gains.

We can see run up last about an hour, but most of the activity happened in roughly 15 minutes. Downhill from there. However, this still could be beneficial for European currencies during next few days, or until other, bigger news emerge. This reaction to Dubai news was it- highlight of the day. Opening gaps didn’t happen, so I largely set on my hands, as far as these type of trades are concerned.

Hourly chart of GBP-NZD looks interesting at this point. It is developing a congestion zone, which could be a reversal, or continuation. I lean towards the former and will look for trend change here. Should the price move above 2.2520, I want to be in seeking 2.2800 level. Perhaps this cross deserves more in depth look but I’ll leave it for other time. EUR-GBP will need updating in next post, and so will Yen pairs. Next few days should be busy.

Mike K.