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Currencies AUD Compass Directions Morning Report Wednesday, 23 November 2011

Indications from the Federal Reserve minutes that more stimulus may be in the pipeline failed to cheer investors as lower than estimated economic in the United States. The Commerce Department released figures which showed that the economy grew at an annualised 2% in the third quarter which was lower than the 2.5% estimate. In a sign of the times, more than 200,000 financial services industry jobs have been lost in the US this year compared to losses of 174,000 jobs in 2009. Markets were calmed somewhat by an IMF announcement that they would expand a programme designed to provide credit lines to nations faced with rising borrowing costs.

In Europe, French and Spanish yields continue to climb higher as the finance spokesman for Germany’s Christian Democrat party commented that “we haven’t any new bazooka to pull out of the bag.” Spreads between French bonds and German bunds continue to point to imminent downgrading in France’s AAA. Investors are clearly signalling that they expect ratings agencies to downgrade France as the spread above bunds hit 200 basis points on November 17. The disintegration of the EUR is becoming an increasing possibility as credit markets continue to price in further turmoil in Europe. The EUR opens the Asian trading session remarkably well poised above 1.3500 with traders speculating that big repatriation flows have been holding up the currency while the Australian dollar is struggling to hold above 0.9830.

Equity markets continued to ease despite further indications that the Federal Reserve is considering another round of quantitative easing. The impact of the Fed minutes was counterbalanced by lower than expected US GDP growth figures. The S&P 500 has closed the sessions 0.41% lower at 1,188 with Dow components Alcoa and Bank of America falling more than 2%. Banks and brokerages were the worst performers in the market with the continued fallout from the collapse of MF Global denting sentiment. Earlier in Europe, the DAX was lower by 1.22% to 5,537 while the FTSE lost 0.3% to 5,206.

Commodity prices managed to consolidate despite weakness in other asset classes. WTI crude rose 1% to $97.90 as the US imposed sanctions on Iran and tensions rose with the situation in Egypt further destabilising the region. Crude has moved into contango with various geo-political risks conspiring to push prices higher. Precious metals have also consolidated with gold higher by 1.28% to $1,700 while silver gained 5.28% to $32.80. Soft commodi-ties were mixed with copper higher by 0.35%. Today with have the release of the Australian Leading Index figure, HSBC’s Chinese Flash Manufacturing PMI while it is a bank holiday in Japan.

GOLD rebounded in offshore trade as concerns about debts, growth and budgets in Europe and the US continue to see buyers into any weakness as the longterm trend continues to the upside. We are seeing a raft of issues in the global economy right now that will continue to support gold prices in the bigger picture but in the short-term we have to be patient and use any dips as an opportunity to get long again. Gold finished US trade stronger by 1.40% at $1,702. It was good to see a solid rebound take prices back above $1,700 last night and even though a base can’t be confirmed just yet, all the fundamentals point to higher prices and we continue to use dips to get long. We still need to see a break back above $1,711 to start and then $1,727/28 and we should be on the way back to key resistance at $1,750. On the downside, support at $1,690 should hold firm today and below here $1,675 should limit any further weakness. With geopolitical issue sin the Middle east, debt problems and growth concerns we will continue to see prices rise. It looks as though the recent break at $1,690 of ST trend support was a false break as we suggested. We target a push through $1,711 today and stops on longs need to remain below $1,675 for now. We are ST bulls back above $1,727.

AUD/USD has been contained to the recent ranges with solid support at 0.9810 still being seen with the level only getting one true attempt to test the level during the middle of the US session after the comments from Germany’s Merkel that the ECB and IMF don’t have a bazooka that will fix the European crisis in one shot! Earlier risk on sentiment didn’t flow into the commodity currencies as risk traders look for a clearer picture then the very fuzzy one the markets and political leaders are giving at present!  In the end the day has been stuck between 0.9900 offers and the 0.9810 support.  There is a little medium level Australian data for the local session with CB Leading Index and Construction Work. However, both should be ignored with Debelle speaking at the APRA workshop.  His comments about mortgage rates on Monday did help support the AUD at the time so traders will be following his reported comments.  Stops building below 0.9800 are increasingly becoming the market’s target.


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