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IG Markets, Afternoon Thoughts

Across Asia, regional markets are mostly lower despite the firmer leads from Wall Street. The Nikkei 225 and Shanghai Composite are the worst performers, both down 0.7% as the Japanese yen rose to a seven-week high against the US dollar. Elsewhere, the Kospi was flat while the Hang Seng was lower by 0.1%.

Locally, the ASX 200 is bucking the broader Asian trend to be 0.3% higher in afternoon trade. It hit an early high of 4799.9 before retreating to be around the 4787 level. Gains were broad-based early, however the last few hours has seen some points come out of the financial and consumer discretionary sectors. On the upside, it is the material, consumer staples and industrial sectors adding the bulk of the points in quiet, holiday trade.

Yesterday’s weakness on concerns of further Chinese rate hikes looks to have been overdone. Commodities in general had a pretty strong session overnight; that looks to have led to the realisation that yesterday’s reaction was harsh and that prospects looking ahead to 2011 were very good indeed. Some traders have used the weakness as a buying opportunity.

While the underlying fundamentals behind the likes of copper and coal are strong indeed, we’re starting to see some US dollar weakness, which has the added bonus of further boosting US dollar denominated commodity prices. It’s very difficult to tell how far these prices could run; one thing we do know is that trends in motion tend to stay in motion, and usually for a lot longer than anybody predicted. Gold is a prime example.

On that note, precious metals continue their push higher with both gold and silver trading near record highs on concerns over the balance sheets of both the European and US economies. These concerns also helped weigh on the US dollar index which, alongside bullish commodity prices sent the AUDUSD screaming to a fresh post-float high of 1.0197.

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