Chinese Currency Surges To 19-Year High

The Chinese renminbi or yuan has surge to a 19-year high as it tested the upper limits of its regulated trading band for the seventh consecutive day as optimism rises that the world's second largest economy will continue to record strong growth. China's process of political transition is due to be finalised when the nation's new Politburo Standing Committee will address the nation's media on November 15.

Recent data releases have seen a surge in capital inflows into China as investors wager that the situation is not as bad as some commentators, including ourselves, have been suggesting. The yuan hit 6.2262, the strongest it has ever been since official rate regulation began in 1993, and traded at the maximum 1 percent premium to the official reference rate of the People's Bank of China.

Meanwhile in the United States, the Treasury Department released figures that showed the budget deficit widened in October, expanding more than 20% to $120 billion from a figure of $98.5 billion last year. The figure highlights the massive challenge that the world's largest economy faces as it confronts the demons of it free spending legacy and the possibility of the fiscal cliff.

If lawmakers fail to stitch together a deal to reduce the budget deficit and avoid the fiscal cliff, automatic spend-ing cuts and tax increases of over $600 billion would be implemented, and the Congressional Budget Office (CBO) has concluded that such a scenario would push the economy into recession next year. The CBO has also forecasted that the unemployment rate would jump to 9.1% by the end of 2013 if the automatic cuts in spending occur.

U.S. share markets continue to trade in very subdued conditions, erasing earlier heavier losses after Home Depot rallied more than 4% on better than expected profit and boosted the entire retail component of the S&P 500. However, financial and technology shares fell to see the index close 0.4% lower at 1,375. Concerns over the fiscal cliff continue to weigh on markets and investor sentiment.

Equities also gained ground after the Greek Finance Minister told the European Parliament that a recent euro-area meeting was constructive and that an agreement on rescue funding should be finalised by a November 20 meeting. Earlier in Europe, stocks closed higher with the FTSE gaining 0.33%, the CAC 40 rising 0.46% while the DAX was flat.

Commodity prices were flat to lower and the CRB index has closed marginally lower to 292.15. WTI crude has eased after the International Energy Agency cut global demand estimates with the price settling 0.3% lower at $85.30. Precious metals continue to consolidate in recent ranges with gold 0.3% lower at $1,725 and silver down 0.13% at $32.45. Agricultural com-modities were mixed with coffee recording the biggest falls of over 4% while orange juice concentrate rose more than 3%. Copper is flat.

GOLD continues to consolidate in tight recent ranges as the markets remain transfixed by developments in Greece and the "fiscal cliff" scenario in the United States. Safe haven demand continues to support the price even as most asset classes wobble under the weigh of risk aversion. Gold traded a $1,718 to $1,732.50 range. U.S. Treasurys continue to experience their biggest rally in five months as investors continue to bet that President Obama will have difficulty in avoiding the fiscal cliff.

Capital flows continue to highlight fears that the automatic spending cuts that will be triggered in the "fiscal cliff" scenario and plunge the U.S. into recession. This scenario fits well with the stimulus junkies' view of the world and as long as monetary stimulus remains the tool of preference for the global central banks, gold will continue to rise. We reaffirm our bullish outlook in the medium and short-term for gold.

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Short-Term Medium-Term
BULLISH BULLISH


AUD/USD traded in a similar pattern to the previous US holiday session as the quiet nature of the markets extended into another day. The risk sentiment looked mix into the Asia afternoon and European morning with what looked to be only euro taking the hit. However, as the euro turned around the improved risk sentiment on the back of rumours that both Greece and Spain were to get imminent funding the AUD started to retest the previous highs of the last week.

A slow climbing US equity market helped the drive but in the end the weight of corporate selling ahead of 1.0450 was too much and we have the pair back at 1.0427 to close out the uneventful day. It is hard to see a change to the markets price action during the Asia session with only medium level Australian data releases and only high impact data coming from the UK. However, some high impact US data should provide some action for the markets but in what direction its to hard to tell as yet. Expected range 1.0390/1.0475.

Compass Direction
Short-Term Medium-Term
NEUTRAL BEARISH
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