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Currencies AUD Compass Directions Morning Report Thursday, 1 December 2011

The Federal Reserve led coordinated action by a total of six central banks to reduce the margin that banks pay to central banks for over-night borrowings by 0.5%. The Fed, ECB and the central banks of Canada, Switzerland, Japan and the UK acted to ease the strain on the global financial markets by cutting dollar swap rates. Furthermore, China acted to cut its banks’ reserve requirements for the first time since 2008. Although the moves have certainly given investors cause to rejoice they are largely symbolic and simply buy policymakers and politicians more time to plan more plans. The EUR surged to as high as 1.3532 overnight before easing back to 1.3430 this morning.

The interventions and actions being taken by central banks and governments are becoming increasingly radical and highlights the in-creasing seriousness of the situation facing the global economy. In better news, data out of the US continues to improve. Americans buying previously owned homes increased more than expected while companies added more workers than forecasted in the month of November and the ISM- Chicago business barometer came in much higher than expected at 62.6 against 58.4 last month. All these fac-tors saw a significant increase in risk appetite and the Australian dollar skyrocketed more than 2 cents to trade as high as 1.0335.

Equity markets rejoiced in response to the coordinated central bank action. European bourses surged with the DAX rising a spectacular 5% to 6,088 while the FSTE gained 3.16% to 5,505. US markets also celebrated the continued run of good economic data and the S&P 500 gained more than 4.33% to close at 1,247. American Airlines took-off by more than 40% after a 85% fall yesterday on their bank-ruptcy filing. Not surprisingly, banking stocks surged with JPMorgan Chase and Bank of America both rose more than 3.5%.

Commodity prices surged as central banks acted to improve liquidity and US companies added 206,000 jobs this month. WTI Crude rose 0.55% to trade above $100.00. Precious metals gained as gold rose 1.88% to $1,751 and silver surged 3% to $32.90. Soft commodities were broadly higher and copper rose by more than 5%. The CRB gained 3.37 points to 313.82.

GOLD finally broke out of the range and posted solid gains in offshore trade on the back of coordinated central bank action to lower USD funding costs. We also saw better than forecast ADP employment data and a reduction in the RRR in China. All of these factors were very bullish for commodities on the night with copper rising by over 5.00% as the USD retreated, especially against the commodity currencies and equities broke sharply higher. Gold finished US trade stronger by 1.80% at $1,746. Gold finally took flight last night as we expected and a break above resistance at $1,727 triggered gains all the way up to key resistance at $1,750 which ended up capping gains on the night. We saw selling in early European trade push gold back to support at $1,700 but this level held perfectly and any weakness was short lived as the central bank action saw a big rally of $50 from the lows. USD weakness and equities rising will support gold prices and even though investors are not piling back into equities they will be buying more and more gold as central bank action shows that there are significant headwinds in the global economy. We remain bullish but we may
see some profit taking today and as long as $1,750 caps we may be prone to pullbacks towards $1,735 and even $1,727.  Above $1,750 is very bullish and targets $1,777 and then $1,800 which is major resistance. China PMI may weaken today so we would be a buyer of pullbacks towards $1,735 with stops below $1,727 on the day.

AUD/USD was the big gainer during the European and US sessions after having collapsed during the London morning as the price broke below our line of 0.9990 to almost meet our 0.9930 target line. The buying ahead at 0.9940 was too solid and the news that the global reserves are coordinating to help aid liquidity to the European Banks has seen the risk sentiment increase greatly with the AUD rallying almost 400 points off the daily low.  1.0330 was the high area and now we have seen new shorts enter on low liquidity to have the pair at 1.0280 as it closes the eventful day. Building Approvals and Retail Sales numbers are due in the late morning with expectations for building to increase whilst Retail remains as is! Expect Asia selling during the morning session as they see the lofty heights with Australian importers likely to increase hedging as well. We will be watching for the price to fall towards 1.0240 initially and if momentum increases a test of 1.0190 is pivotal!


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