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Currencies AUD Compass Directions Morning Report Tuesday, 20 December 2011

European leaders met to formalise additional funding of EUR 200 billion to the International Monetary Fund and the details of the fiscal accord that was negotiated at the European Summit held on December 9. However, this had minimal impact on market sentiment which was dominated by comments by ECB President Mario Draghi. Market sentiment was negatively impacted and the EUR has once again fallen below the psychological 1.3000 level.

Draghi said that the ECB cannot increase government bond purchases under EU law stating that “the treaty forbids mone-tary state financing”. In an interview with the Financial Times Draghi commented that the ECB must act within its mandate and legal foundations and that if it did not do so it would risk destroying its credibility. The issue of bond purchases has been a very divisive issue which appears to have prompted the resignation of ECB member Juergen Stark who was very crit-ical of the bond purchases. The latest comments by Draghi make the ECB’s position increasingly clear and markets fell on the news. The Australian dollar has borne the brunt of the risk-off environment falling a cent from the overnight highs to trade as low a 0.9883.

Equity markets slumped after the release the ECB President Draghi’s comments. The S&P has closed the session down 1.17% to 1,205.35. Financial stocks were hardest hit with Bank of America losing more than 3.5% to close at its lowest lev-els since March 2009 while Morgan Stanley fell more than 5%. Earlier in Europe, the DAX fell 0.54% to 5,671 while the the FTSE closed 0.41% lower at 5,365.

Commodity prices consolidated with the CRB index gaining 0.82 points to 294.77. WTI Crude gained marginally to $93.60 as geopolitical tensions rose after the death of Kim Il Jong and the West looks likely to enforce stronger measures against Iran. Precious metals remain vulnerable with gold losing 0.27% to $1,594 while silver has fallen 2.92% to $28.80. Soft com-modities were broadly higher while copper has lost 1.22%.

GOLD continues to consolidate despite falling equity markets and continued pessimism over Europe in a sign that the price may have bottomed after last week’s fall that seemed to be prompted by signs that the Federal Reserve is less likely to pursue further quantitative easing. Gold traded in a $1,587 to $1,608 range overnight. It has given up gains above $1,600 as the EUR and equity markets fell in response to ECB President Draghi’s comments about the significant risks in Europe and how 2012 will be a very difficult year for the banks. This prompted a sell off in financial stocks. Gold has now slumped more than 17% from its all time record high of $1924 achieved on September 6 despite being still 12 higher for the year. It opens this morning barely changed from the levels yesterday morning and our view on the metal has not changed. We are still looking for the price to spike above $1,640 to confirm that a bottom is in place and for us to change our medium term view to bullish.

AUD/USD was caught up in the risk off tone as news reports that Kim Jong-Il had passed away over the weekend filtered across the markets. South Korea raised their threat level with the Asia equity markets running for cover. The heavily tone saw the price fall to 0.9900 and the recovery started in late Asia and continued during the European session as Bond Auctions went better than expected and expectations of more funding for the IMF did the rounds with the AUD hitting a high in the mid 0.9960’s.  However, the bid tone changed when an email report from the Basil committee warned about capital commitments. Now we close the US afternoon with the price back towards the daily lows and with a heavy tone the price looks like extending during the early Asia morning. CB Leading Index is released ahead of the RBA Monetary Policy Minutes and with expectations about continued rate cuts the markets will be watching closely. Any sign of a continued reduction in rates will lead to more weakness for the AUD!


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