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Currencies AUD Compass Directions Morning Report Friday, 18 November 2011

Investors once again looked for the exit signs last night as developments out of Europe gave rise to increasing concerns over the debt crisis. Reuters reported a European official saying that there were no plans to include aid for Italy from the Europe-an Financial Stability Fund. At the same time, an auction for Spanish and French saw yields rise as demand for Spanish bonds fell to the lowest levels since 2008 while spreads above German bunds for peripheral bonds continued to rise before a minor recovery. Spanish 10 year bond yields are perilously close to breaching the 7% danger zone. The Dollar Index has now risen for the fourth straight day as yields on US 10 year Treasuries fell below 2%. The EUR is struggling to hold above 1.3450.

In other news markets were also spooked by developments out of the US with a deadlock between Republicans and Demo-crats in the so-called Congressional Super committee threatens to delay the formulation of a plan to cut the US deficit. With less than a week to go before the deadline for submission of the plan, investors are being reminded of the debacle surround-ing the negotiations over the raising of the US debt ceiling earlier in the year. All asset types were sold as investors fled eve-rything except US Treasuries. It was no surprise that the Australian dollar crashed below parity to trade as low as 0.9972.

Equity markets were slammed as debt related issues on both sides of the Atlantic dominated the headlines. The S&P 500 has closed down 1.7% at 1,216 as losses accelerated when the index fell through technical levels monitored by traders as the in-dex breached the 100 day average of 1,226. The retailer Sears fell more than 4% on higher than expected losses while Alcoa and Intel both fell more 2%. Earlier in Europe, the DAX fell 1.07% to 5,850 while the FTSE was down 1.56% to 5,423.

Commodity prices were hammered overnight as markets reeled. WTI plummeted on rising EUR concerns and the rally prompted by the reverse in direction of a major supply pipeline in the US all but evaporated as prices fell more 3.4% to test $99.00. Precious metals were also hard hit with gold falling 3% to $1,721 while silver plunged more that 6% to $31.70. Soft commodities recorded multi-percentage point falls while copper prices fell 3.3%. Overall, a terrible night for commodities with the CRB index down 7.99 points to 314.52.

GOLD saw heavy selling in offshore trade as most asset classes were sold off last night on increasing concerns in the Eurozone and the effects a recession will have on the rest of the global economy. No asset was spared as the USD gained sharply and equities tumbled seeing commodities sold off across the board and growth and demand concerns grew on the night. Gold finished US trade weaker by 3.05% at $1,720. Gold was not spared in offshore trade as even perceived safehaven assets were sold off as investors moved to cash on the back of increased concerns in Europe. Having said this, Gold has held up very well in the face of such strong USD buying and still remains above trend support which resides at $1,690/95. Only a breach here will have us concerned. Remember, markets have been loading up on precious metals of late so it is not surprising to see a pullback even when safety flows should pick up. Now that longs have been flushed out of the market we should see trend support hold and another big move higher occur as equities stabilise. We turn neutral in the short-term until we see a close back above $1,750 but remain bullish in the MT above $1,690/95. Buyers should keep stops just below this level and look to buy dips towards $1,705/10.

AUD/USD bounced to meet 1.0120 resistance during the London morning as the market continued the squeeze higher which was started during the Asia early afternoon. However, with risk sentiment decreasing across Europe as bond yields moved even higher the AUD fell back down to the 1.0030 support area. Solid buying from profit takers and range guys thinking the positive US data would see a correction back towards 1.0120 were mistaken as the pair topped out ahead of 1.0100 as commodities were hit with a new link to falling equity markets. Late in the US afternoon the 1.0030 support gave way with momentum selling kicking in and we are now closing the day just below parity. Data free Friday yet again and with the bearish tone of the equity markets AUD could come under pressure. However, with Sterling and Euro holding in overnight we could see some punters willing to buy AUD as a high risk reward trade but we will leave that to them. We missed out on turning bearish on the short term bias overnight as our 1.0150 target wasn’t meet so we will continue with the medium term position for now.


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