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Currencies AUD Compass Directions Morning Report Tuesday, 6 December 2011

Chancellor Merkel and President Sarkozy are now calling for a revamp of European Union rules to promote better econom-ic cooperation between member states. Markets were buoyed after both leaders announced that they would be pushing for automatic penalties for deficit violators and placing debt limits into the constitutions of member states. Sarkozy said that he expected consensus on these changes by March next year. These moves are largely symbolic and reactive and do not offer any solutions for the current debt crisis. The Euro is opening this morning lower at 1.3400 as rumours circulate that S&P are placing all 17 Euro zone nations on downgrade watch.

Investors now await the December 8-9 EU leaders summit to be held in Brussels which is expected to speed up the intro-duction of the permanent rescue fund to 2012. Comments by ECB Chairman Mario Draghi have made it clear that tighter fiscal cooperation is required to save Europe and it appears that the French and Germans are starting to heed these calls. However, the French and Germans will now need to put their money where their mouth is and this will be the crucial test. However, Merkel and Sarkozy continue to reject the idea of a euro bond with Sarkozy saying, “What a strange idea to put European debts in the same pot.” The Australian has held up rather well at 1.0250 as investors await the RBA rate decision to be announced later today.

Equity markets pared earlier gains after speculation that S&P would place France on Germany on creditwatch negative. Eu-ropean shares closed marginally higher as investors continue to remain optimistic that some sort of “final” plan to save Eu-rope will be formulated at the upcoming EU Summit. The DAX closed 0.42% higher at 6,106 while the FTSE gained 0.28% to 5,568. American stocks continue to make good gains as the S&P 500 gained 1% to close at 1,257.00.

Commodity prices eased overnight. WTI crude was impacted by the Financial Times reporting that S&P will put France and Germany on “creditwatch negative”. It has eased 0.17% to $100.79. Precious metals fell with gold lower by 1.49% to $1,725 while silver lost 2.27% to $31.95. Soft commodities were mixed while copper lost 1%. The CRB index is down 0.55 points to close at 313. Today we have the release of the Australian Current Account and the RBA Rate announcement.

GOLD came under some modest selling pressure in offshore trade as commodities reversed course on the back of weaker US services PMI data and talk of a potential downgrade on all 17 Euro nations by S&P. We ultimately saw profit taking set-in and nothing more and weakness in the USD helped to limit any significant losses. The Euro remained under pressure on the back of this news and this capped any gains in commodities as investors remain edgy. Gold finished US trade weaker by 1.45% $1,723. Commodities came under pressure and gave back gains after a strong performance in early trade as rumours of a downgrade to sovereign nations in Europe pushed us back towards session lows even as it looks like we could see some decisive action later in the week to create a more structured and uniformed Eurozone.  Copper prices suffered along with crude which ultimately lead to broad selling pressure that saw a profit taking move rather than any serious sell off or trend change. We remain bulls in both timeframes as last night we maintained $1,711 and major support at $1,690-$1,700. Expect these levels to be short lived and we are a buyer here with stops under $1,700 safer stops would be below $1,690. Support at $1,717 should hold today for a push back towards $1,727 initially and then above here to $1,735.

AUD/USD was lifted by the risk sentiment increasing on the back of the meeting between Merkel and Sarkozy and the Italian Parliament passing $30bio in new austerity measures. The climb into the US morning was cautious as the pair started to reach 1.0300 as expecting selling ahead of last weeks high of 1.0330 was thick enough to stall the rally. The quick about face of the market as rumours of rating agency S&P putting on watch the 17 Eurozone members for a possibly downgrade has caused the risk sentiment to quickly change with the AUD falling back to 1.0250. AUD has managed to hold in well as we see the pair closing the day at 1.0279 as the market looks to have positioned itself a little short heading into today’s RBA decision on rates. Many are expecting a cut because of the Euro crisis and the weak nature of Retail  Spending and the property market, also with no January meeting the RBA time span is too long to wait! Solid support into 1.0200 will be hard to break on anymore ahead of the RBA if seen.

 

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