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Currencies AUD Compass Directions Afternoon Report Monday, 12 December 2011

Speculation that China will loosen monetary policy saw the markets firm in trade today with a smaller than expected trade surplus and the weakest export growth since 2009 adding to the speculation. However, although equity markets have closed the day higher, the major currencies have all lost ground against the USD. The GBP is trading near the day’s lows at 1.5630 and the Australian dollar is closing the afternoon at 1.0160 after trading as high as 1.0220 this morning. The USD has rallied on the back of fading optimism surrounding the latest European accord.

The EUR eased in trade today to as low as 1.3333 as investor scepticism over the latest European accord rose. In a repeat of the previous EU Summits, it appears that optimism reached a crescendo immediately after the meeting amid the grand announcements by the major players before the devil in the details start to play on investors’ minds. The President of the Bundesbank has made comments to a newspaper that although the new agreement represents progress, the responsibility for the financial ammunition required to fight the debt crisis stays firmly in the hands of individual countries and not the ECB. He stated that “financing of sovereign debt through central banks is and remains forbidden by treaty.” European leaders have now set another deadline of March 2012, this time for the wording of the new rules and the finalisation of the plan for the region’s permanent bailout fund.

Asian stocks were higher with the MSCI Asia Pacific rising more than 1% buoyed by US consumer confidence which came in at 6 month highs. The Hang Seng is higher by 1.42% to 18,851 while the Nikkei surged 1.6% to 8,673. The ASX 200 closed higher by 1.18% to 4,253 despite Eurozone concerns with all sectors rising led by energy and finance stocks. Overnight we have speeches by the Governors of the English and Canadian central banks. The eyes of global investors will be firmly fixed on the credit markets tonight as both Italy and France will auction more debt.

Commodity prices fell in trade as optimism over the latest Euro accord faded. WTI crude continues to fluctuate as continuing concerns over Europe and Iranian calls for production cuts before an OPEC meeting this week. It closes the afternoon down 0.2% to $99.22. Precious metals have eased with gold losing 1.16% to below $1,700 on the back of possible fund sales and silver lost 1.5% to $31.76. Soft commodities continue to ease while copper lost 1.19%.

GOLD took a beating in Asia trade today pushing through support at $1,700 on the back of nothing. There was no real reason for the move today and we put this down to poor liquidity in Monday morning trade and rebalancing of books by fund managers going into years end. This is most likely a false break and if we see a push higher tonight then we can confirm that this was nothing but a chance to trip stops in Asia and get long at lower levels. Gold traded in a $1,684-$1,715 range and finished the session weaker by 1.20% at $1,694. This looks to us like a false break of support as currencies barely moved and equities were steady when the sell-off occurred in Asia today. It was also interesting to note that we saw a similar sell-off in Silver earlier in the session suggest to us that it was an order rather than any real fundamental move. We turn neutral for tonight to see if we can confirm that this was a false move and any move higher back to $1,710/15 in Europe or the US will signal just this.  However, if we do see follow through selling push through $1,665 then we could be in for further selling back towards major support down at $1,600. We are seeing some bullish divergence here and favour buying dips still as support at $1,665/75 remains in tact. Offers are initially at $1,700 and the $1,710/15 should see strong selling interest return with a break clarifying that today was a false move.

AUD/USD has had the market tone plus the weaker than expected Trade Balance numbers against it today as the price fell from the opening levels this morning near 1.0220 to close the day at 1.0177 after having made a 1.0161 low. The heavy tone related to the expectations or fallout of the EU summit as the major players try to work out if the EU has really provided anything new and if the undertaking that they did manage to take will have any effect in the short term.  We are hearing that there is some decent M&A flow buying into the AUD at present and this is soaking up a bit of the liquidity and is a major factor as to why the AUD hasn’t fallen but at this stage we have not been able to confirm. If this was to be correct and it ends whilst the majors are falling the slide could get nasty and I would not want to be in front of that train. 1.0050 remains the key on the downside whilst 1.0275 if reached starts to see us squaring for the break.


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