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Currencies AUD Compass Directions Afternoon Report Wednesday, 21 December 2011

Markets continue to be buoyed by the better than expected data releases out of the US and Europe last night. A fall in Spanish borrowing costs at a successful bond auction overnight has also given investors hope that the situation in Europe is stabilising. The broad increase in risk appetite has seen the Dollar index fall by 0.2% and the EUR advance to above 1.3100.

Loans from the ECB to banks throughout Europe announced in early December by ECB President Draghi will commence tomorrow. In news outside of Europe, Chinese Premier Wen Jiabao announced his support for exports by stabilising policy surrounding exports and providing capital to small companies. The change in market sentiment has seen the Korean Won and Australian dollar advance strongly. The AUD closes the afternoon above 1.0140.

Asian equity markets have been boosted by the strong data releases out of the US overnight and Chinese Premier Wen an-nounced his support for the export market. The MSCI Asia Pacific has gained 2% with seven shares gaining for every one that fell. Taiwan’s Taiex (TWSE) was the best performing Asian stock market rising more than 4%. The Hang Seng is higher by 1.6% to 18,639 while the Nikkei has gained 1.28%. The ASX 200 has closed 2.13% higher at 4,139.

Commodity prices continue to firm in Asian trade. WTI crude has advanced another 0.71% to $97.93 on continuing concerns over supply issues related to Iran and speculation about falling stockpiles in the US. Precious metals also gained with gold higher by 0.55% to $1,626 and silver gaining 0.4% to $29.65. Soft commodities broadly gained while copper is up 0.25%. Overnight, look out for the the UK MPC Meeting Minutes, US Existing Home Sales and the US Crude Oil Inventory report.

GOLD has benefitted from a decisive return in risk appetite precipitated by strong US data overnight and falling yields in European bonds.  The range today has been $1,615 to $1,628 and is closing the afternoon near the session highs.  As we had expected the price continues rise and consolidate and a test of major resistance just above $1,640 is imminent. If equity markets can maintain the gains seen over the past few trading sessions we see a test of this level in trade overnight.  On a break and close above $1,640 we will change our medium term outlook on gold to bullish. A Christmas rally in equity and commodity markets should see gold easily breach this level as price momentum continues to build after last weeks significant price falls.  Although any increase in geopolitical tensions in Iran and Korea may have a negative impact on equity prices, we believe that a rush to gold as a tradition safe haven is likely. Support can be found at $1,608 with initial resistance at $1,629.

AUD/USD has continued with the bullish tone that was shown during the European and US session yesterday as the market is currently being controlled by leverage accounts and talk of interbank traders hunting EURAUD stops below the January 20111 report lows at 1.2910.  There was a jump during the morning session as the Australian Data was better than the previous and with the spot market knowing it had full control the end result is more stop hunting with the price somewhat over jumping our 1.0130 expected top.  The head of steam which the pair currently has is going to be hard to stop and we could also be seeing some of the M&A buying we were talking about early last week in the current flow mix. Should this continue its hard to see the AUD heading back towards parity anytime soon. However, for now if we had to trade we would be selling into the current spike or looking towards the EURAUD cross with the idea of buying Euro.

 

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