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Currencies AUD Compass Directions Afternoon Report Thursday, 24 November 2011

The disastrous German bond auction last night that saw almost 40% of bonds on offer left unsold weighed heavily on Asian markets today. Investors are now largely sidelined waiting to see what will happen to credit markets over the next few sessions after the shock development overnight which has many a market participant scratching their heads or running for the exits. The spotlight will be firmly on French and Spanish bond yields with increasingly speculation that France will imminently see a credit rating downgrade. The EUR has recovered from lows today at 1.3337 to close the afternoon at 1.3370.

As if the bad news out of the US and Europe weren’t enough, Jim Chanos, the hedge fund manager and short seller who predicted the collapse of Enron, made comments that the Chinese banking system is extremely fragile and “built on quicksand”. Chanos believes that Chinese banks are burdened with massive amounts of non-performing loans which have been accumulating for decades. The MSCI China Financials Index of banks stocks has lost more than 32% this year over concerns about bad loans to the local governments and the deteriorating housing market. In other news, India’s central bank moved to loosen regulations in relation to the rupee to stem the recent fall in Asia’s worst performing currency. The Australian dollar has regained the 0.9700 level today in light liquidity after trading as low as 0.9681 this morning.

Equity markets in Asia were relatively unchanged despite the big falls in US equity markets overnight. The MSCI Asia Pacific is up 0.3% after falling as much as 0.7% after the release of worse than expected US data and new so the disastrous German bond sale. Trade, however, was extremely illiquid with most investors staying on the sideline as the situation in Europe rapidly deteriorates. The Hang Seng is up 0.45% to 17,945 while the Nikkei fell 1.46% after being closed yesterday. The ASX 200 closed th day relatively un-changed ay 4,048 with materials and industrials the worst performers.

Commodity were largely untraded with the CME closed for the US Thanksgivings Holiday. WTI Crude rose 0.15% to $96.31. Precious metals eased slightly with gold down 0.26% to 1,694 and silver fell 0.58% to $31.80. Soft commodities were untraded while copper rose 0.61%. Overnight, all eyes will once again be on the credit markets in Europe, the German IFO Business Climate figure and the UK GDP.

EUR/USD came under continued pressure in the early Asian session trading to as low as 1.3337 before a slow grind higher to the day’s highs at 1.3386. Trading volumes were extremely thin today with most market participants sidelined after the situation in Europe took a dangerous turn overnight as the Germans failed to find enough buyers for their bonds. As Belgian and French bond yields continued to rise so has risk aversion. Expect further weakness in the currency pair tonight. Barring some sort of unprecedented and highly coordinated action by the ECB and governments, the writing is on the wall. One of the reasons cited for the recent steadfastness of the EUR despite the rapidly deteriorating credit markets is the repatriation flows, These flows will soon end a retest of support at 1.3250 is imminent. A break of this level will see an extended move towards 1.3180.  We will be looking to close some of our short positions if this scenario plays out.

GBP/USD traded in a range of 1.5514 to 1.5560 and is closing the afternoon around 1.5550. An extreme lack of disinterest and illiquidity has seen low volumes the order of the day. Overnight we have the release of the revised GDP q/q with the consensus at 0.5%. We are expected a softer number of 0.4% and this will precipitate further falls in the sterling. The failure to break above the previous trend line support at 1.5550 in trade today is a bearish signal for the currency. There is very little interest from traders to take on the historically high volatility currency pair when the markets are so sensitive to developments in Europe and are so primed for big moves in response to shock developments.  Traders should remain very cautious of trading GBPUSD in this environment.  Even if your direction call is correct, the volatility may stop you out! We remain bearish in the short and medium term and we will continue to run our profits. We will not be looking to add to our shorts unless there is a break of 1.5400.

USD/JPY broke back down towards 77.00 during the Asia morning as the market saw the overnight bounce as a prefect time for renewed shorting of the USD. The break below 77.25 was enough to spark the decline and as the minor support at 77.00 was seen it was enough to have the intraday traders locking in profit as the afternoon quickly approached. Reports that the Japanese are transferring assets from Gilts to Bunds seems a little hard to believe but Bloomberg ran the article earlier today. What does this mean for the markets? Little for the USDJPY as the market flow still remains heavy and any bounce which has been seen like today will be sold into! We still believe the price will head back towards 76.50 in the coming days and break lower. For two reasons. The market remains heavily long the USD expecting the BOJ to come in and continue the intervention towards 80.00. Furthermore, the old safe haven tag will see funds flow into Japan as we don’t have many places to protect wealth with the fall of the Euro.

AUD/USD continued to remain heavy during the morning session as the news wires and market reporters signalled an end to the current strength of the Australia Dollar with the view that the currency would suffer on the back of the expected slowing of China as their biggest trading partner and Europe is close to collapse!  Minor buying at 0.9680 was enough to hold the pair up and during the late morning buying from profit takers was enough, with help from Exporter buying, to take the pair to the current level of 0.9720 to close out the afternoon trade.  Its hard to see anything but a weaker AUD over the course of the next couple of days but look for the European leaders to be working hard over the coming European session to chin wag the markets about how they are sorting the crisis out and that things are better than the rest of us are seeing. A break below the US session lows will lead to the bearish momentum taking the price towards 0.9500.


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