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Currencies AUD Compass Directions Afternoon Report Wednesday, 23 November 2011

The HSBC Flash Manufacturing PMI for China came in at 48 versus a reading of 51 in the previous month. A number of below 50 indicates contraction and that was enough to send investors rushing for the exits as this was another sign that the European debt crisis is beginning to cut Chinese export demand and may led to a bigger than expected slowdown in China. The fall in manufacturing was the sharpest in output since March 2009. Market fears of a hard landing in the world’s second largest economy has seen the USD strengthen against the majors with the EUR trading to as low as 1.3450 while the GBP is struggling to hold above 1.5600.

Whilst the slowing of the word’s second largest economy dominated the financial news wires today, the situation in European will come back into focus with European manufacturing data being released overnight. Investors will also be keeping a close eye on the credit markets and any further rises in Spanish and Italian bond yields will lead to further strength in the USD. There will also be close scrutiny of Belgian bond yields after Dexia SA slumped by more than 8% overnight. The Australian dollar continues to fall and is currently trading just above 0.9750.

Asian stocks fell with the MSCI Asia Pacific, excluding Japan which was on holiday, is down 1.6% heading to its lowest close since early October with more than seven shares falling for every one that rose. Equity markets continue to be on tenterhooks as surging bond yields in Italy and Spain point to a spreading crisis in Europe. Not even speculation that the Federal Reserve may announce another round of quantitative easing could stems the falls. The Hang Seng was 1.85% to 17,913 while the ASX 200 closed 1.77% lower to 4,059.80. Shares in mining and steel companies were hardest hit after Australia’s lower house of parliament passed a resources tax that will result in these companies paying more than $11 billion in extra taxes over the next three years.

Commodity prices continue to ease. WTI crude futures fell 1.15% to below $97.00. Crude prices fell with speculation that rising stockpiles in the US and the European debt crisis will reduce fuel demand. Precious metals were mixed with gold higher by 0.30% to $1,707 while silver fell 1.21% to $32.60. Soft commod-ities were broadly lower while the copper prices fell 0.45%. Overnight we have the release of French and German Flash Manufacturing and the UK MPC Meeting Minutes.

GOLD saw a rise in safe-haven flows in Asia trade today as news of a potential failed bailout of Dexia has lead to increased concerns that France may soon loose its AAA rating as debt problems mount and yields rise. We also saw China’s HSBC manufacturing PMI data weaken below the critical 50 level which signals that China may be slowing faster than we first though. Gold traded in a $1,695-$1,710 range and finished the session stronger by 0.35% at $1,708. IT was clear after the negative news flow today that safe-haven flows were piling into Gold as in recent weeks we have seen prices fall as the USD gained and equities tumbled but today was different and we finally saw demand return as conditions deteriorate in global markets. We are now happy to turn bullish again I the short-term even though our target resistance level has not been breached yet as the price action today was clearly
bullish in light of equities and the USD. We expect demand to pick up in offshore trade and for a test of $1,711 initially and then potentially even $1,735 tonight as we work our way back up to $1,750. It is clear that the recent breach of support at $1,690 was a false break and as we continue to say, the fundamentals have not changed and prices will continue to rise in coming months and years.  Support sits at $1,690 and stops on longs should remain just below $1,675 for now but a break above $1,727 and these should be trailed higher to $1,685.

AUD/USD is much weaker on the day as bearish European momentum carried into the Asia open and with the announcement that the Australian Mining Tax had passed the Lower House also causing concerns at a time when the commodity markets are looking shaky at best.  The break below 0.9800 support took some time and the better than expected building data did nothing to support the decline. Once the Chinese Flash PMI data came out weaker than expected giving up all of last month’s gains taking the AUD to meet new support at 0.9750. We close the day with the price remaining well offered and looking only a matter of time before the next leg lower starts. As we reported on CNBC this afternoon the AUD looks more than likely to suffer large falls with the NZD in tow as the risk sentiment reduces as the European crisis expands into the other member states. We will be watching for the 0.9750 level to give way with small support at 0.9715 before 0.9680 is targeted. Sub that the market will have 0.9500 in the crosshairs.


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