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Currencies AUD Compass Directions Afternoon Report Monday, 28 November 2011

Markets were buoyed today by the news that the IMF is considering offering Italy a loan of up to EUR 600 billion to assist the nation’s borrowing requirements for the next year at highly subsidised rates. Furthermore, there is speculation that France and German are working out the details of a plan that would see the ECB take a more ac-tive role in bringing Europe back from the brink of collapse. Investors also chose to focus on the biggest year on year rise in Thanksgiving retail sales ever recorded in the United States as US consumers tried to buy themselves out of the doom and gloom . After rising to as high as 1.3336, the EUR is easing in afternoon trade to below 1.3300. The Dollar index lost the most since November 11 as the majors gained.

Investors chose to ignore the action of ratings agencies over the weekend which cut the ratings of both Portugal and Hungary to junk and Belgium’s rating from AA+ to AA. The optimism in the equity markets is clearly not being seen in the credit markets as bond yields of the peripheral nations continue to rise with Italian two year yields threatening to crash through 8%. None of the plans being suggested and speculated about are addressing the core issue of too much debt. We fear that investors are becoming increasingly weary of the rhetoric and may very soon act out their impatience and frustrations which could lead to a major market upheaval. After having traded as high as 0.9889 as optimism rose, the AUD is now easing back towards 0.9840.

Equity markets soared on the renewed hope of a European miracle despite the weak performance of US equities on Friday. The MSC Asia Pacific Index is higher by 1.8% with more than four shares rising for every one that fell. The index is now trading at 12.3 times estimated profits which is well down on the five year average multiple of 16.4. The Hang Seng is higher by 1.87% to 18.020 while the Nikkei has gained by 1.6% to 8,292. The ASX 200 has closed the day 1.85% higher at 4,058 snapping a six day losing streak with financials and materials gaining the most on the day.

Commodity prices firmed today. WTI Crude rose more than 1.6% to $98.40 on the back of the announcement of sanctions against Syria which adds to Iranian sanctions and Egyptian unrest to unsettle investors amid rising ten-sions in the Middle East. Precious metals also recorded strong rises with gold gaining 1.25% to $1,709 while silver rose 2.21% to $31.78. Soft commodities were broadly higher with copper gaining 2.56%. Overnight, we have the release of the high impact UK Inflation Report and US New Home Sales.

GOLD posted strong gains today as the USD weakened sharply and equities gained on the back of better retail sales data for Black Friday and as the IMF may come to the rescue for Italy and ultimately the Eurozone. Commodities broadly gained and Copper prices definitely helped out on the day rising by over 2.50%. Precious metals gained as investors are not moving into equities and this is rather a shortcovering move for now so upside for Gold remains significant. Gold traded in a $1,679-$1,708 range and finished the session stronger by 1.30% at $1,706.  There are some really bullish indicators for gold prices right now and the double bottom recently seen down at $1,675 is confirmation in our view of a move higher but we still need to break some further resistance levels to confirm this. Resistance at $1,711 is key and we must break firmly through the level to trigger accelerated gains in the coming sessions. The MACD and RSI are both showing significant bullish divergence on both the hourly and 4 hourly charts and we are now back above the 50day moving average which resides at $1,700. Support sits initially at $1,690 and lower at $1,675 which must hold otherwise we are in for further declines back towards 41,600.

AUD/USD bounced sharply during the Asia morning as the markets looked to the IMF bailout rumours as enough to start a risk sentiment bounce with the pair reaching into the high 0.9800’s as expected. We ended up selling into the bounce as we reported during the Asia report and once the confirmation to the markets that the IMF has not got a pot of so called $600bio ready to bail out Italy the pair quickly fell back to meet new support at 0.9820. Since the pullback the risk sentiment is still mixed as equities finished higher and the US Retail Sales over the Thanks Giving weekend have been very strong. We have changed the bias to bearish in the short term as expected with the bounce to 0.9885 the pretty level to get short once again and we thank the bulls for the trade.  We have trailed the stop to the break even level and now we can sit and watch the European open. We are looking for the pair to break 0.9820 with 0.9760 being a little tougher but needed in the next 24 hours for bearish momentum in the shorter term to continue.

 

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