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Currencies AUD Compass Directions Morning Report Friday, 25 November 2011

The end may be near for the European experiment as the headlines become more sensationalist and investors begin to act in a self-fulfilling manner to unravel to the Euro. A Bloomberg headline read “Germany Buys Itself First Class Ticket on Titanic” in a story about the failure of Germany to attract bids for all of its bonds in its latest auction. As long as Germany continues to oppose the idea of com-mon Euro-bonds, the chances of the Eurozone remaining intact will fall. Germany will take a hit to its AAA rating is it decides to ulti-mately share the debt burden with the rest of Europe. Otherwise, Germany is indeed captaining a sinking ship. The EUR opens the Asian session at 1.3340.

The bad news surrounding debt in Europe, the US and China over the last few day now spreads to Japan as S&P indicated that it was preparing to downgrade the nation’s sovereign debt rating. S&P cited the lack of progress by the Noda government in addressing public debt. S&P’s director of sovereign ratings was very succinct when he said “Japan’s finances are getting worse…every second.” Japanese debt levels will breach 1 quadrillion yen ($13 trillion) next year as the nation pays for reconstruction efforts after this year’s devastating natural disasters. USDJPY is trading above 77.00 while the Australian failed to hold onto gains above 0.9750 as it struggles amid the global turmoil.

Equities were subdued over night as the US was closed for the Thanksgiving holiday. General lack of investor interest and fatigue over debt woes across the globe saw low liquidity dominate markets. European stocks fell after Chancellor Merkel again ruled out the idea of a Euro-bond and discounted calls for greater powers for the ECB to fight the debt crisis. In Europe, the DAX closed 0.54% lower to 5,428 while the FTSE lost 0.24% at 5,127. Asian markets will most likely be quiet ahead of the weekend.

Major commodity exchanges were closed for the US Thanksgiving holiday. WTI crude oil rose 0.89% to $97.03 as tensions in the Middle East and the Iranian situation held up prices. Precious metals treaded water largely unchanged with Gold at $1,698 and silver $31.92. Soft commodity markets were shut while copper was also flat for the day.

EUR/USD rallied during the European morning as the DAX bounced and the Bond markets weren’t getting the moves seen during the previous days. More talk of ECB buying Bonds with pockets that wont empty supported the pair into the US morning. Position squaring from the bears also had an effect as taking profits is much easier than cutting losses. Talk of option expiries in NY at 1.3400 kept the price bid during the US morning but once the market thinned out the price moved quickly lower as Germany’s Merkel again confirmed her parties view on no Euro Bonds! In the end the pair fell to make another new low at 1.3315 and as we close the day the price has seen a little bottom picking with the price returning to 1.3346 to close the day. I really wan to stay with the short bias in the shorter term but the smarter play would be to square up as liquidity will be thin and past US session holidays have lead to large bounces in the Euro. Square up and take the rest of the week off sitting on nice profits!

GBP/USD was trapped in a choppy range during the London session as the market was effected by the mixed data with Business Investment dropping sharply. Adding to the weaker tone was the BoE Broadbent who said this was the most serious time in the last 100 years for the British economy and he sees a recession in the near future. The Cable broke below 1.5500 during the US session as earlier attempts found solid option related buying but in the end we see the price closing below 1.5500 at 1.5493. As for the next couple of sessions with the US Thanks Giving holiday more than likely going to have a late effect on liquidity with the flow already being reduced likely movements are going to be over extended and when the US had Veterans Day back on the 11th the Euro and Sterling staged large bounces, so we are changing our short term bias to neutral as taking a new position around here is to high risk for us. We will be looking for bounces to possibly enter a new intraday short if 1.5620ish is seen.

USD/JPY continues to trade within the new range as the markets reaction to the Thanks Giving holiday was to leave the USDJPY alone and no real attempts to take it either below the 77.00 support of the 77.20 offers. And with this in mind today will most likely be contained as well unless the Tokyo CPI and National CPI numbers are away from the markets forecast targets – 0.3% and 0.1%. BoJ Gov. Shirakawa is speaking after the data releases and of interest will be his view on the European crisis and the effects it is likely to have on the Japanese economy and the likely direction the BoJ will take as the USDJPY continues to fall and looks more than likely to head back towards 75.50. We saw the major banks with RBC London calling the USDJPY to below 70.00 during the beginning of 2012. This is nothing we have not been reporting now for the last 3 or 4 months but I have to say its nice for the big banks to jump on the bandwagon as they are the ones with the prop desks that drive the positions.

AUD/USD followed the rally of the Euro during the European morning as the better risk sentiment or more likely lack of new sellers as the market squares ahead of the US Thanks Giving holiday long weekend. Talk that option expiries at 0.9750 and 0.9800 contained the pair until the rolled off at the NY option cut off also did the rounds and this looks more than correct as selling after that and the London 4pm fix has taken the pair back down to close at 0.9727 which is just above the London opening level. The Australian Reserve Govenor Stevens spoke last night and his view is the European crisis has a long way to go with the effects being seen across the globe but with minimal effect on the Australian Economy.  Could this be because the AUD would tumble as China slows down and this could possibly boost commodity exports or just the profit of what is sold. Anyway, it looks more than likely the AUD is headed lower over the next couple of months as even the leaders are talking lower but remember
when they start talking about it in th taxi its time to turn long!


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