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Currencies AUD Compass Directions Afternoon Report Tuesday, 20 December 2011

The RBA Monetary Policy Meeting minutes released today showed that the bank believes that an “investment boom” is coun-tering the negative effects of the European debt crisis. The minutes showed that the bank saw no “strong need” to lower rates at its meeting in early December but did so due to the “possibility of a very sharp contraction” in Europe. Traders bought the Australian dollar from 0.9892 to as high as 0.9942 as the chances of further aggressive rate reductions by the RBA fell. De-spite being the only G10 nation to avoid recession in 2009, Australia is still headed for its worst annual jobs growth in 15 years.

The situation in Europe will continue to weigh on investor sentiment and the focus will remain on further comments by the ECB President, the credit markets and bond yields for Eurozone nations. The EUR has firmed marginally to above 1.3000 while the USDJPY traded in a 10 point range.

Asian equity markets made modest gains as South Korean shares pared their losses from yesterday’s falls triggered by the death of Kim Jong Il. The Hang Seng is higher by 0.54% to 18,168 while the Nikkei is up 0.45% to 8,333. The ASX 200 has closed down 0.18% to 4,053.

Commodity prices have firmed today in subdued conditions as traders were more interested in the festive season than anything else. WTI crude firmed by 0.4% to $94.25 as geopolitical risks on the Korean peninsula and the Middle East rise. Precious metals were mixed with gold higher by 0.14% to $1,599 while silver has fallen 0.1% to $28.85. Soft commodities were mixed while copper has lost 0.23%.

GOLD continues to consolidate with the price trading in a relatively orderly manner within a $1,589 and $1,602 range and closes the afternoon at $1,597. ECB President Draghi’s comments about the state of the European economy did not have the same impact as they did on the US markets as much of what he had said was clearly apparent to all. The subdued trading conditions have allowed the gold price to stabilise and we expect that the price should head higher over the next session to above $1,600. We remain bullish in the short term and will be looking for a price move towards $1,640 before we change our medium term view to bullish. Critical support remains at just above $1,532 and we will be keeping a close eye on this level if the gold price does in fact fall towards this level. A break of $1,530 would be a highly bearish signal for us. Look for support at $1,587 and resistance at $1,601. Short term higher risk tolerance traders could look for a $10 bounce from current levels.

AUD/USD opened the Asia morning down below 0.9900 as the US afternoon bearish tone controlled on the comments about Draghi limiting ECB purchases of bonds.  However, bottom picking names and the bullish expectations from the RBA, stating it was a close call for the reduction of rates at the December meeting taking the shine of the markets expectations of a continued interest rate slide during the New Year! We now close out the afternoon with the price bouncing to be at 0.9937 in slow and illiquid volumes.  Is hard to know what the European and US markets have in store for the little Aussie battler!  However, we still lean towards the downside as we see risk being taken off the table, heading into the holiday and New Year period.  0.9860 is still the level it needs to break for the pair to again restart the momentum which was seen early last week and the week before.  However, we do fear a short squeeze towards 1.0025 if the downside doesn’t come soon.


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