Compass Directions – Afternoon Report Tuesday, 15 November 2011
Fears that the European debt crisis will spread beyond control were once again at the top of investors’ minds today as the borrowing costs for Italy and Spain continue to surge. Italian bond yields rose following a debt auction while the spread between Spanish and German 10 year bond yields rose to a euro-era record. The support from Chancellor Merkel’s Christian Democrats for a plan to allow member nations to exit the EUR and the announcement by their finance minister that a permanent bailout fund may not be operational until 2013 did not help investor sentiment. The EUR fell to as low as 1.3593 in trade today.
The Australian dollar was initially supported by the release of the RBA minute meetings before easing in late afternoon trade falling to as low as 1.0159. The RBA noted a “modest easing of global risks” while stating that “there has clearly been material changes to the recent course of, and outlook for, underlying inflation over recent months, while the downside risk for the global economy had increased.” The AUD was buoyed by comments that seemed to suggest that there was a case for keeping interest rates unchanged to await the inflationary effects of commodity prices. The interest rate swap market indicated that traders reduced their expectations of a rate cut by December from 100% to 84% after the release of the minutes. The AUD closes the afternoon at 1.0180.
Stocks across Asia fell with the MSCI Asia Pacific Index down 0.6% with two stocks falling for every one that rose with banks and export-ers the hardest hit. The Nikkei is down by 0.78% to 8,537 while the Hang Seng is down 1.09% to 19,295. The ASX 200 has closed the ses-sion down 0.44% to 4,286 with the big banks falling and losses being led by materials and gold stocks.
Commodity prices eased further following the loses overnight. WTI crude oil is lower by 0.4% to $97.75. Precious metals lost ground with gold lower by 0.53% to $1,769 and silver has eased 0.22% to $33.95. Commodities are mixed while copper prices have closed the Asian session flat for the day. Overnight we have the release of French and German Preliminary GDP, UK CPI and HPI and the high impact German ZEW Economic Sentiment Index.
GOLD came under some selling pressure in Asia today as the USD continued to strengthen against the AUD and EUR and we are just seeing profit taking ahead of support at $1,750 which should see strong buying interest re-emerge. We saw equities continue to weaken and we are not surprised to see some weakness in precious metals as investors who did dip back into the markets are now having to stump up for margin calls. Gold traded in a $1,765-83 range and finished the session weaker by 0.50% at $1,769. We were slightly surprised to see the push back through support at $1,773 today but do not read too much into this as it could have been a decent sized order getting done in illiquid Asian markets or just the USD strength forcing prices lower before Europe comes in. There is room for further declines so if we were to look at the bigger picture any further weakness must be limited by support down at $1,695 at worst but we do not se this happening. Support at $1,750 should hold and we should then see another test on $1,800/02. We are slightly cautious going into a raft of economic data tonight but still favour a small long position at these levels and buying more on a break above $1,800/02.
AUD/USD opened the morning session back towards 1.0200 with early corporate selling taking the pair to 1.0185 before the Monetary Policy minutes signalled that the RBA were unlikely to continue to cut rates at the present time. The pair rallied back above 1.0200 but with the market looking shaky during the late afternoon with longs having bailed on positions with the price tumbling to close the day at 1.0173 after making a 1.0160 low. With the negative tone leading into the twilight zone and European open we are looking for the pair to break the 1.0155 support and make its way towards the 1.0100 level and possibly lower lets say parity if the momentum picks up, which looks more than likely. On the topside resistance will now been seen at 1.0200 and again at 1.0225/30 with the later being the more important. A break of here could start a short covering squeeze with yesterdays shorts quickly trying to lock in profits. If we were to see the 1.0350 area reselling could be an option.
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