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Currencies AUD Compass Directions Morning Report Wednesday 4, January 2012

Increasing signs that the US economy is rebounding sent markets higher overnight while the USD lost ground. A series of better than expected data out of the US has given investors increasing confidence that the world’s largest economy will be able to weather any further deterioration in Europe. Manufacturing across the globe improved in December and in the past few days manufacturing figures bettered estimates in China and Germany while overnight figures released showed factory output in the US grew at the fastest rate in 6 months. Furthermore, construction spending in the US rose in November for the first time in four months. The USD fell as a result with the EURO surging to as high as 1.3078.

In other news, the Federal Reserve announced that it would, for the first time, make public its own forecasts for the federal funds rate at it meeting in late January. This initiative is another step towards greater transparency under the leadership of Ben Bernanke. Last month’s FOMC minutes also placed further pressure on the USD, as it indicated that further easing may be considered, with the minutes reading “a number of members indicated that current and prospective economic conditions could well warrant additional policy accommodation.” The Australian dollar was the big winner overnight, surging to above 1.0385 on all the good news.

Equity markets surged in a new year rally with the S&P 500 gaining 1.55% to close at 1,277. The better than expected manu-facturing figures saw financials surge more that 4.5% while industrials and commodity producers also recorded strong gains. Earlier in Europe, the DAX gained 1.5% to 6,166 while the FTSE surged 2.29% to 5,700 as a surprising lack of bad news or negative comments by European leaders saw the markets rise. Developments overnight should see a strong performance in Asian equities today.

Commodity prices surged on the improving global manufacturing outlook. Crude oil catapulted higher on increasing Iranian tensions and global manufacturing growth. WTI futures surged 4.2% to above $103.00. Precious metals rallied strongly as the USD weakened with gold rising 2.46% to above $1,605 while silver surged 5.85% to $29.50. Soft commodities broadly gained while copper gained more than 2.7%. The CRB index is 8.11 points higher at 313.41.

GOLD has surged more than 2% overnight to recover the $1,600 level after having traded as low as $1,572 yesterday. A weakening USD saw the metal trade as high as $1,608 as investors also sought the safety of gold as the situation in Iran looks likely to escalate after the release of news yesterday that the nation had successfully produced its first nuclear power rod. The fear trade has seen gold jump the most in almost 10 weeks to start the new year on the front foot after recording the 11th year of consecutive gains in 2011. The metal outperformed global equities, bonds and the USD last year and looks likely to continue to outpace other asset classes this year.  We remain cautious in our outlook for gold due to the illiquid and volatile conditions. We await confirmation of a renewed bullish trend which will be signalled by a close above resistance at $1,640 before we change both our short term and medium term outlook to bullish. Today look for support at $1,588 and resistance at $1,620.

AUD/USD continues to surprise us with its remarkable resilience and was the main beneficiary of the improvement in risk appetite and generally illiquid market conditions.  After opening the session yesterday below 1.0230 it surged overnight to as high as 1.3088 on the back of string US economic data, surging equity markets and renewed talk of further stimulus in the US. The sharp rise overnight can be largely attributed to illiquid conditions and we expect a retracement lower in trade today. Our medium term forecasts still call for the AUD to be trading closer to 0.9500 within the next six months as the situation in Europe worsens and the Chinese economic miracle begins to wane. We remained consistently bearish the AUD in 2011 and continue to maintain this view. Today look for support at the 1.0300 and resistance at 1.0400 to cap moves. We will also see AUD cross selling by corporates as the AUD trades near record highs against the EUR and the GBP.


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