Markets Lower after Fitch Downgrades Spanish Credit; Gold Buying Opportunities Seen at 1520

Risk sentiment was lower overnight after the US Federal Reserve made no mention of economic stimulus. This was enough to disappoint markets even after the People’s Bank of China reduced interest rates by 25 basis points. But is remains clear that the problems seen in the Eurozone will require more than token measures in order to encourage markets enough to create a sustainable rally.

The Bernanke comments did acknowledge that downside risks continue to create vulnerability in the US economy and that all policy tools remain available if there are significant changes in growth data. Overall, analysts are interpreting the comments to mean that there will be no substantive policy changes announced at the June 20th Fed meeting.

Other headlines centered on the decision by Fitch to downgrade the long term credit rating in Spain by three levels, to BBB. The decision was based on the need for recapitalization practices in Spanish banks, which, according to Fitch could be as large as 100 billion Euros. This figure would be equal to 6 percent of annual GDP in Spain and Fitch suggested that is recapitalization measures are appropriately undertaken, government debt in Spain will top out in 2015 and reach a peak of 95 percent of annual GDP. The downgrade was only a surprise to the more optimistic market analysts, so the impact of the headline was limited.

Looking ahead, today’s main economic releases will come with the Canadian Housing starts and Labor market surveys as well as the Trade Balance release from the US. The Trade Balance figures are expected to show a drop in the deficit, to $48.5 billion. In Canada, the jobs data is expected to show a monthly increase of 15,000, which is a sharp drop from the 58,200 that was seen in the previous month.

Technical Analysis:

The AUD/USD is attempting to bounce out of daily support at 0.9660 even the level was technically broken previously. We did not see a daily close here, however, so the bias is ambiguous at this stage. So far, the bounce has been minimal and failed just ahead of parity. If we do see a move back above parity, the bounce will be seen as valid, but a daily close below 0.9660 will be significantly bearish for the pair’s long term prospects. MACD is still showing negative momentum with a large histogram, so short term traders can enter into sell positions with stops above parity.

Gold prices are failing after the latest rally with resistance now viewed at 1630. An upside break here will accelerate gains, as this is where the 100 and 200 day EMAs are resting but the shorter term prospects favor range trading, with the lower end now seen at 1520. More broadly, 1520 is an excellent buy area with strong risk to reward elements as any sustainable rally will target the double top that is seen just above 1800. But the MACD reading suggests some additional downside before this rally is likely to take hold.