The recent news that Dubai suspended the repayment of its $59 billion debt sent shockwaves through the markets. Some shockwaves were expected, others came completely out of the blue.
In the first category there are the news of the spreads widening. In the second enter the appreciation of the yen, completely unexpected. Nobody was thinking that the panic will make the yen become what it was once – a safe haven for the investors. Yet, the yen continues to trade higher and higher.
The main resource of Dubai was the oil. And the government from Dubai has to repay somehow their debts. Even in the case of default, they must repay at least partially those bonds. It means that the Dubai sovereign funds and the Dubai asset owners must pump more oil to sell on the global market. The OPEC cartel will see again a disagreement on keeping up the prices. This time, the disagreements will not come out of the traditional markets such as Venezuela or Iran, but rather from Dubai, forced to increase its oil output in order to cash in more dollars for the service of debt.
In what currency is the oil sold today mostly? Yes, you are right in USD, which means that we might see in the incoming weeks a drop in the oil prices and an increase in the USD versus Euro. I am not 100% sure how soon this will come – maybe after the first settlement of the debts and after Dubai will publish its first agreements. But I could bet some money for beer on this…