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Currencies AUD Compass Direction Morning Report Wednesday, 21 December 2011

Christmas has come early for traders as markets celebrated better than expected data on both sides of the Atlantic. In the US, housing starts and building permits came in higher than expectations and the German Ifo Business Climate confidence index also rose unexpectedly. Housing starts rose to the highest level in over a year. The ECB also offered cheap 3 year funding to banks and a Spanish short term debt auction was well received. Despite a strong performance in both equities and commodity markets, the EUR, still under significant pressure, has managed only modest gains to open this morning at 1.3080.

A combination of the RBA minutes which showed that Australia’s Reserve Bank reduced rates in December largely on the back of a potential meltdown in Europe rather than any overriding domestic concerns and an improvement in risk sentiment has seen the Australian dollar rally strongly to as high as 1.0096 overnight after having traded as low as 0.9892 during yesterday’s session.

Equity markets globally surged on the back of stronger than expected economic data in both the US and Europe. The S&P has closed almost 3% higher at 1,241.The homebuilders segment of the S&P index rose by more than 5% in response to the good housing data. Earlier in Europe, about 14 shares rose for every one that fell in the Stoxx 600. The DAX rose 3.11% to 5,847 while the FTSE rose a more modest 1.02% to 5,420.

Commodity prices rose as the risk pendulum once again swung to the opposite direction overnight. WTI Crude oil prices surged on the back of better than expected US housing data and speculation that further sanctions against Iran will impact supply. Crude prices rose more than 3.5% to $97.20. Precious metal prices also gained with gold higher by 1.30% to 1,617 while silver rose 2.43% to 29.58. Soft commodities were broadly higher while copper gained more than 2%. The CRB index gained 5.85 points to 301.67.

GOLD rose overnight as better than expected data across both sides of the Atlantic in the form of US housing data and German business confidence saw most asset classes gain as risk appetite improved.  The range overnight was $1,597 to $1,619.  As we had anticipated the price has spiked above $1,600 and we expect the price to continue to consolidate and rise from the current levels to the next resistance level. We believe now that a bottom in the gold price is in place after the big falls sustained last week in response to a Federal Reserve that was less accommodating to further quantitative easing. The continuing run of good economic data may mean that the chances of quantitative easing are falling further but this has not prevented the gold price from rising higher. Gold continues to confound us somewhat as it continues to rise in “riskon” sessions and fall during times of risk aversion.  This has been a recent phenomenon and we are looking for a reversal in this trend. We continue to expect the price to spike above $1,640 where we will change our medium term view to bullish.  Today, look for support at $1,608 and resistance at $1,620.

AUD/USD was caught up in what wefeared for the bears as the market saw a very strong short squeeze as the mix of better than expected UK and Eurozone data started the ball rolling with the Eurozone Bond Auctions again being well taken up. The jump through parity offers happened after stops were again tripped with the release of the better than expected US housing numbers. However, as the liquidity continues to decrease the rally extended to meet solid selling ahead of 1.0100 and the reports that Fitch has put 12 European Bank on warning saw the rally stop. We now have the pair closing the US session well bid at 1.0079. The feared bounce was quicker and stronger than expected but with the markets positioning being about 3 to 1 favouring the short side it shouldn’t have been a surprise.  We will look for the interbank traders to test 1.0100 offers during this morning and sell into a pop as this current rally is nothing more
than old position covering!


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