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Currencies AUD Compass Directions Morning Report Friday, 23 December 2011

Markets were buoyed overnight by the release of better than expected US data which continues to affirm the increasingly optimistic view of economic growth in the world’s largest economy. Americans applying for unemployment benefits fell to the lowest levels since early 2008 at 364,000 while an index of consumer confidence beat analysts forecasts to rise to a six month high. However, third quarter US GDP grew at a slower pace than expected at 1.8% but still much better than the 1.3% recorded for the previous quarter. The USD has held its ground overnight and as Asia opens the EUR is trading at 1.3050 while the AUD is at 1.1028.

In other positive news, UK GDP rose more than expected by gaining 0.6% on the previous quarter. The Bank of England put a dampener on the result by saying that it is unlikely to be repeated due to the European debt crisis and the impact on bank lending. Furthermore, the BOE does not expect the UK economy to grow until the second part of 2012 as unemployment remains at a 17 year high. The GBP opens up the morning at 1.5670.

Equity markets globally were driven higher by the better than expected US economic indicators. The S&P 500 has closed higher by 0.83% at 1,254 and looks set to record its third weekly gain in December. Financial shares were the biggest gainers with Citigroup and Bank of America all rising more than 4.5%. Earlier in European, the DAX gained 1.05% to 5,852 while the FTSE gained 1.25% to 5,457.

Commodity prices rose with the CRB index gaining 1.77 points to 305.67.WTI continues to gain trading above $100 before settling up 0.8% at $99.50 as US economic indicators continue to show signs of strength signalling an acceleration in growth. Precious metals softened marginally with gold down 0.46% to $1,606 while silver lost 0.59% to $29.05. Soft commodities were mixed while copper gained 0.72%.

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GOLD traded in a $20 range last night between $1,597 and $1,617 and is opening this morning at yesterday’s support level of $1,606. Gold has now fallen for three out of the last four days as US economic data continues to be strong and there appears to be a recovery underway in the US employment markets. The USD has gained and the demand for alternative investments has waned somewhat. Further weighing on the gold price has been a drop in investor funds being held in exchange traded funds. Holdings in bullion backed EFTs have fallen for the firth day to their lowest levels since November 16 as investors continue to sell the metal to cover for losses in other markets. After reaching a high of 2,361 metric tons in mid December, EFT holdings have fallen to 2,330 metric tons as of yesterday.  Gold’s recovery of the $1,600 level is a positive sign of price consolidation and we continue to expect a test of major resistance at $1,640.  For today look for support at $1,597 and resistance at $1,620.

AUD/USD cruised back above 1.0100 during the European morning as the European traders tried to test the topside again and they were correct as new shorts built up over the Asia session were squeezed and once the Italian vote passed the price extended to 1.0150. The solid offers and the pivot point we have been watching at the 1.0155 level held the rally. Better than expected US data which in the past would have seen the AUD rally on better risk sentiment is the opposite in the current climate with the AUD pulling back to 1.0100 before stabilizing and returning towards the days highs during the early US afternoon after a slightly better bid S&P500. The lack of data for the AUD is again the case today, so traders will be looking to reduce risk trading with Aussie traders more focused on Xmas drinks and desk cleaning for the next two weeks of holidays. Seeing a move back towards 1.0100 or slightly lower is our favoured option. However, building US stops above 1.0155 could be a target and if tripped sell into the over extended bounce for a quick pullback.

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