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Currencies AUD Compass Directions Morning Report Monday, 19 December 2011

In a week that was dominated by further negative developments out of Europe and news that the Federal Reserve may be less likely to pursue further stimulus, markets eased. The USD made gains over the week as investors continued to seek safe haven assets. The Dollar gained 2.5% against the EUR last week as the European debt crisis continues to escalate with European bond yields continuing to rise. The Australian dollar opens the week below parity trading at 0.9960.

European finance ministers are expected to hold a conference call overnight to discuss EUR 200 billion in further funding through the IMF and the details of the fiscal accord that was negotiated at the December 9 European. Officials have set a deadline to arrange the IMF loans for today. Despite the self imposed deadline the Bundesbank has said that it sees “no urgent need” to reach a decision. EUR 150 billion has been pledged by euro-area central banks while EUR 50 billion will be contributed by non-EU states. Fitch has lowered France’s credit outlook and has said that a comprehensive solution to the debt crisis may be “technically and politically beyond reach” Moody’s Investors Service also cut Belgium rating by two levels to Aa3. The EUR has managed to open this morning above 1.3000.

Although recording small gains for the two last sessions of the week, US equity markets recorded losses for the week. The S&P 500 fell 2.8% for the week to break a two week run of gains and was only saved from further losses in the last two sessions by better jobless claims and manufacturing data which offset news surrounding the European debt crisis. On European bourses, the DAX closed 0.5% lower to 5,702 while the FTSE lost 0.25% to 5,387. Investors continue to be swayed intermittently by either the increasingly positive economic data out of the US against the negative news headlines coming out of Europe.

Commodity prices gained marginally with the CRB index rising 0.55 points to 295.00. WTI Crude oil closed the session to record the biggest weekly decline since September on the back of concern that the European debt crisis will stifle economic growth and curb fuel demand. Crude lost 0.4% to close the session at $93.53 losing almost 6% for the week. Precious metals managed to gain after a volatile week with gold higher by 1.31% to $1,598 and silver rising 1.35% to $29.67. Soft commodities gained while copper has recovered 1.96%. Today, we have a data free day on Asia so expect subdued trading conditions. We may see heavy conditions today as the markets re-sponds to the double downgrade of Belgium.

GOLD has begun to recover from the significant falls it experienced last week in the wake of the Federal Reserve meeting that was the least accommodative to further stimulus in a long time. A strong run of economic data has made the chances for the further quantitative easing fall and this heavily impacted on the gold price last week. Gold fell almost $200 in one week is yet to recover levels which we would consider as a sign of the price bottoming. However, gold has since recovered to trade just below $1,600 after failing to break below $1,550 and the critical $1,530 level. As long as the European debt crisis remains a significant weight on investor sentiment, we expect that the gold price we remain well supported as its safe haven status remains intact. The recent consolidation may stimulate fresh buying as long as gold stays above critical
support and the hedge fund stop loss selling we saw last week dissipates. We remain bullish in the short term as we continue to see bullish divergence and a base forming above $1,550. If gold can recover the $1,600 level today we should see an imminent test of $1,642. If this level is regained we will return to a bullish stance in the medium term.

AUD/USD climbed to look above parity during the slow European session as the markets were happy with a slightly more bullish bias as the Spanish and Italy Bond auctions were again well received. However, the downgrades by Fitch during the US Monday on a couple of Banks from both side of the Atlantic quickly saw the hours of work lost as the pair was hit by a wave of risk off selling to have it testing new support at 0.9935. Reduced liquidity late in the session saw the pair recover a little to close the week at 0.9966. Data free Monday for the local markets and as we draw closer to the summer holiday period expectation for large scale moves have to be reduced during the Asia session as the pattern was clearly shown last week and should only be heightened this week. Support at 0.9920 is becoming more important as the time ticks away and if broken the pair could extend to our 0.9860 pivot without much resistance.  Topside we are expecting the offers to continue in the mid 1.00’s for the next couple of days!


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