Isra-Mart srl: Forex Technical Analysis Overview: October 26th

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Tonight, Chancellor Merkel will address the German lower house before a vote on the increase of Germany’s contribution to the European rescue fund. The vote will pass as Merkel’s coalition have persuaded the opposition parties to support the proposal by promising to pass a motion that will cap the German guarantees. However, intense discussions are still taking place in Brussels over the mechanisms surrounding the operation of the EFSF, the quantum of forgiveness in relation to Greek debt and the plan to recapitalize banks. The markets now enter a period of significant event risk with investor expectations for a workable European rescue package so high that a disappointing summit result could precipitate a catastrophic sell off in the markets.

Closer to home, inflation in Australia slowed to its lowest levels in 14 years and prompting traders to increase their bets that the Reserve Bank will re-duce rates next week. The Australian dollar fell from as high as 1.0439 to as low as 1.0354 as a combination of the inflation data and jitters over Europe hit the currency. The numbers indicate that the Australian economy may be softer than many had expected and will continue to weigh on the AUD. In other currencies, the EUR is closing the Asian session at 1.3915 while the GBP consolidated above 1.6020.

Equity markets reversed earlier losses, prompted by European fears, when Chinese Premier Wen Jiabao made comments which suggested that the nation may ease monetary policy. His comments that China will make adjustments at a “suitable time and by an appropriate degree” and is studying “stimulative policies” saw markets stabilize. The ASX 200 was supported by the inflation data which pointed to an imminent reduction in rates by the RBA. The index gained 0.35% to 4,242 with gold and copper related stocks rising as commodity prices surged overnight. The Hang Seng is down 0.11% to 18,947.80 while the Nikkei is flat at 8.766.78.

Commodities continue to perform well despite the jitters surrounding the European summit and the promised announcement of a rescue plan. WTI continues to gain, rising to as high as $93.65 today. Precious metals continued to gain on safe haven buying on the eve of the European summit. Gold is higher by more than 0.8% to $1,717 while silver is 1% higher to $33.40. Soft commodities were mostly higher while copper surged more than 2.4%. Overnight, we have the release of US New Homes Sales and Durable Goods orders and the Bank of Canada Monetary Policy Report.

GOLD:

GOLD continued to post fresh monthly gains in Asian trade today as investors pile back into precious metals in the lead up to the EU Summit meetings. As crude prices remain well bid so do Gold prices and copper is helping t support commodities across the board. We see the move higher as safety flows and USD weakness related flows for now. Gold traded in a $1,694-$1,718 range and finished the session stronger by 0.90% at $1,715. Another solid performance for Gold today in Asia and we expect the run to continue as investors look for places to park their cash as uncertainty remains in global markets, and in particular, Europe. Some may expect a pullback from here but we may not get it as investors may start to jump over one another to get long again as their money sits on the sidelines and needs to provide returns which Gold may well do. WE remain firmly bullish but do not count out a pullback towards $1,677 but this should limit declines. We remain long at $1,635 and now trailstops higher to $1,670 for now. Solid offers should start to slow gains towards $1,725/35 and a breach would be very bullish and could see a quick move targeting $1,800/20. Buying dips remains the strategy in this market.
Compass Direction: Short-Term: BULLISH ; Medium-Term: BULLISH

AUD/USD:

AUD/USD opened the local session at 1.0420 with the focus firmly on the CPI q/q release at 11.30am local time after Deputy Gov. Battellino signalled the RBA would be watching it closely for the possibility of a cut in interest rates as early as next Tuesday. The result coming in as expected at 0.6% gave the markets fuel for fire that the RBA will cut next week and the pair fell sharply lower to meet our pivotal support line at 1.0355. The level has held during the afternoon and with the majors finding late Asia buying and AUD having nothing to do with it, it is looking likely for a fall during the European morning especially if there is any sign of the Euro weakness seen yesterday. On the charts the 1.0355 support remains the key for the next two sessions or until the EU summit results are announced. We are looking for the release to disappointthe high expectations of the markets with the risk currencies falling sharply but until then we shouldn’t see any great moves. Solid selling at 1.0440 should be able to handle rallies for now.