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Currencies AUD Compass Directions Morning Report Friday, 16 December 2011

Concerns over the European debt crisis were overshadowed by stronger than expected economic data out of the US. The US Labor Depart-ment released figures that showed that initial jobless claims fell by 19,000 to 366,000 last week to their lowest levels since May 2008. Further-more, two reports from New York and Philadelphia indicated that manufacturing expanded more than forecast while the Federal Reserve Bank of New York’s general economic index rose it the highest levels in seven months. The general strength of the data has prevented further falls in the markets overnight. The EUR has recovered to above 1.3000.

Meanwhile, Christine Lagarde, the MD of the International Monetary Fund made comments that, in the absence of the strong US data, would have triggered another market meltdown. She said that there is no country in the world that will be “immune to the crisis that we see not only unfolding, but escalating at a point where everybody would actually have to focus on what it can do.” Rising protectionism and isolation will lead to a situation similar to “what happened in the 30’s and what followed is not something we are looking forward to.” Despite these dra-matic comments, the Australian dollar has recovered to above 0.9900 after having traded as low as 0.9860 during the European session.

Equity markets have stabilised after the release of stronger than expected US data. European bourses rose after Spain successfully sold EUR 6 billion in long term bonds with the DAX gaining 0.98% to 5,730 and the FTSE rose 0.63% to 5,401. In the US, the S&P500 has closed 0.32% higher at 1,215 as financial stocks rallied. Today, we have a data free Asian session so expect subdued conditions.

Commodities continued to ease overnight after the massive rout in the previous overnight session. WTI crude futures have fallen another 1.40% to $93.60 in response to Fed data that indicated falls in industrial output for the first time. Precious metals fell again on the back of a reduction in the probability of additional stimulus by the Fed Reserve. Gold is heading for its first quarterly loss in over 3 years losing 1% to $1,569 while silver gained 0.19% to $28.99. Soft commodities were mixed while copper has lost 0.55%. The CRB index has lost 0.84 points to 294.45.

EUR/USD opened the European session just below 1.3000 and once the better than expected Spanish government bond auctions took place the risk sentiment across all markets increased with the Euro rallying towards the middle of the 1.30’s. New offers and profit taking from intraday speculative names capped the topside twice and once the negativity started again thanks to Lagarde and Draghi the price dipped briefly back below 1.3000 before squeezing back to the middle of the range to close the US session at 1.3017.  Well that was a surprise with all the market data being released during both Europe and America, we were expecting a much more volatile two sessions of trade and to see a 70 point range in the Euro is very very disappointing!  However, the quiet nature is likely to be even tighter than yesterdays 16 point range during Asia! Dips towards 1.2980 should provide a floor whilst offers just above from rangers look likely to cap!

GBP/USD moved higher during the London morning despite the weaker than expected data releases, as the risk market sentiment increased because of the Spanish Bond auctions and some positive Eurozone data! The rally took the Cable above 1.5500 to make a 1.5530 top before the US morning selling restarted as warnings from Lagarde and Draghi about the state of the European Union and possible actions that the ECB could take in the future disappointed. These caused a short dip back to 1.5470 before we now close the day still being higher at 1.5508. Whilst we are not expecting much for the last session of the Asia week, a continued squeeze higher is not out of the question. We could possibly see a bounce towards 1.5570 where we should see new selling and longer term traders turning over some of the positions they squared when the price neared 1.5410. A dip towards 1.5470 should be enough for Asia but a break lower should see us return to 1.5410 soon.

USD/JPY has fallen back below the 78.00 handle during the late European and early US morning as the risk sentiment increased, so did the flow back out of the USD. The positive Spanish Bond auction and some OK European data lead the risk recovery. USDJPY fell to a low of 77.75 as the pair just managed to get weak stops right on the 77.80 level. However, the momentum could not continue lower as the major player are still sitting on the sidelines with the USDJPY at present because of a couple of factors, one being fear of BoJ intervention and the other the flow related to safe haven movements on the large investors and money managers. The lack of data across the Asia region should ensure a slow day for the markets with traders focusing on Christmas shopping and plans for the holiday break. We are expecting today’s range to be 77.70 on the downside and offers at 78.00 even to cap any potential topside moves.

AUD/USD rallied strongly during the European session as the risk tone improved on the back of the Spain Bond auctions doubling the expected investment amount and whilst early US morning data was also better than expected. The AUD price managed to reach 0.9990 before option related selling and new bears took the opportunity to jump on the squeeze. Slow US session trade and the same sort of warnings from Lagarde and Draghi took the shine off the day and we now have the AUD closing at 0.9925.  Data free Friday again for the Australian markets and with a lack of Asia data releases or events today it looks very unlikely that we will see any major movements with the tone during Asia this week being more focused on the coming holidays than any sign of market volatility.  We will be looking for continued selling into the high 0.9900’s to cap any topside movement and dips towards 0.9880 should just about do it for today!


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