Compass Directions Morning Report Friday, 2 December 2011
President Nicolas Sarkozy warned overnight that the Eurozone would “explode” if the 17 members failed to become more united on fiscal policy. In a rare admission of what economic commentators have been saying for years, Sarkozy said “There can’t be a single currency without economies heading toward more convergence. If living standards, productivity, and competitiveness gaps widen among Eurozone countries, the euro will sooner rather than later be too strong for some and too weak for others and the euro zone will explode.” Spain and France successfully sold EUR 8.1 billion which eased the upward pressure on peripheral bond yields. The EUR opens the Asian session at 1.3460 after trading as high as 1.3522.
In Germany, Chancellor Merkel continues to resist calls for an expanded role for the ECB in favour of more budgetary controls and tighter economic ties in the euro zone. Merkel has so far resisted following the Federal Reserve and the Bank of England in implementing policies that she views as es-sentially fighting debt with more debt. She is expected to outline new EU rules at the upcoming December 9 European summit that will quarantine the ECB from political pressure. After the market upheaval in the previous sessions it was not a surprise to see the markets settle overnight. The AUD is opening the day at 1.0240.
Markets were subdued as investors await the release of the US non-farm payrolls data tonight. After staging the biggest three day rally since March 2009, the S&P 500 has closed the session 0.19% lower at 1,245. Stocks had earlier risen as manufacturing data grew at the fastest pace in 5 months but pared earlier gains after the Massachusetts Attorney General said that she is suing a number of major banks for “unlawful and deceptive conduct” in foreclo-sures. Earlier in Europe, the DAX lost 0.87% to 6.036 while the FTSE fell 0.29% to 5,489.
Commodity prices eased after the impressive rally of the previous session. WTI crude eased by 0.28% but remains above $100 as geopolitical tensions remain high in the Middle East. Precious metals were flat with gold easing 0.15% to $1,747.70 and silver flat at $32.80. Soft commodities were mixed while copper is down 0.91%. The CRB index is 0.51 points lower at 313.31.
EUR/USD dipped to 1.3420 during the European morning as ECB President Draghi warned about the slowing economy and the risks being placed on the funding costs of the Eurozone nations at the EU parliament. The negative tone was a surprise with past Trichet comments always having a silver lining. However, with the markets unwilling to take new risk on board the pair snapped back to extend towards the previous days highs but yet again the drive in the market was not there. Improving US ISM Manufacturing PMI data gave the USD back some momentum during the US afternoon to have the Euro closing the day mostly unchanged. The next 24 hours of trading is most likely going to be a range traders paradise with the major players unlikely to start a new trend with US Payrolls at the beginning of the US day. After that is a little harder to pick. Look for support around 1.3380 to stop declines and offers towards 1.3500 to slow rallies ahead of the major number!
GBP/USD fell sharply during the local morning despite the Manufacturing PMI coming in slightly above expected despite it still being below the neutral 50 number. The move below 1.5670 saw the bulls get squeezed as the pair dipped to 1.5635 but like the actions seen across the markets the bearish momentum could not continue as the major traders sat on the sidelines in a pattern that is normally seen a couple of days below the US Non-Farm Payroll numbers. The snap back in the price saw the pair reach 1.5745 and after than during the US session the price remained within a tighter range and closing almost at the same level as where it started the London session 1.5682. Range trading looks the only option for traders willing to have a go ahead of the US data as we can’t see a new trend starting on the last day of the week. Selling into the expected offers at 1.5750 with stops above 1.5780 targeting 1.5650. Downside is a little harder to pick as momentum could possibly build on weakness so keep positions small.
USD/JPY dipped to retest the new 77.50 support during the European session as the risk off tone being seen in the Euro drifted across to the EURJPY and GBPJPY crosses. However, as the majors turned around in controlled trading the USDJPY pair has recovered to close the stuck between 77.60 and 77.80. We close the US session with the pair in the middle of the US session range and really looking unlikely to do anything in the foreseeable future. Building offers from Japanese corporate’s between 77.80 and 78.30 should be able to handle anything that the next two sessions can throw at it but with the fast approaching US Non-Farm Payroll numbers we can’t see the markets doing much unless today’s Japanese
data throws some spanners in the works. Capital Spending and Monetary Base, however, are unlikely to cause a major move anyway. SO in the end range traders will be looking to buy dips near 77.55 and sell them or turn at 77.75.
AUD/USD dipped lower during the European morning as the risk tone of the markets decreased as ECB President Draghi spoke to the EU parliament about the possibility of the economy slipping into recession as the funding costs continue to rise for the group of nations. The break below the Asia session low of 1.0185 did see the market take out some weak stops but the mixed tone of the markets and the normal quiet nature a couple of days ahead of Non-Farm Payrolls saw the price only dip to 1.0155 before recovering the losses and settle in for the rest of Europe and the US session at 1.0225. With it being data free Friday for the Australian markets and the pending US data we can’t see any major moves. Sticking to the overnight ranges looks more than likely with talk that range trading bids have been placed inside the overnight low and offers remain around 1.0250. A break of 1.0250 could lead to a squeeze towards 1.0300 but 1.0280 offers should cap.
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