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Currencies AUD Compass Directions Afternoon Report Thursday, 22 December 2011

The size and number of loans that the ECB has granted to European banks overnight has stunned investors and seen the markets lose ground in trade today. ECB President Mario had announced the unprecedented three year loans on December 8 and there is an expectation that banks will use the fresh capital to buy government debt. The EUR continues to head back towards the 1.3000 level after trading almost as high as 1.3200 before the ECB announcements on the bank borrowings.

In other news , the Swiss Franc has eased against both the USD and the EUR after Finance Minister Widmer-Schlumpf said that a committee is evaluating measures that include capital controls and negative interest rates to the arrest the strength of the currency. The Australian dollar is trading mid range at 1.0085 as the USD continued to gain ground in Asia today.

Share markets across Asia fell on concerns over the European debt crisis as ECB lending highlighted the great difficulties faced by the European banking sector. Stocks fell from their week highs and the MSCI Asia Pacific lost more than 0.5% with two shares falling for every one that gained. The bank loans handed out by the ECB represent more than 60% of all European debt maturing in 2012. The Hang Seng has lost 0.52% to 18,321 while the Nikkei is lower by 0.63% at 8,407. The ASX 200 has closed the day down1.18% to 4,091.

Commodity prices have been largely subdued as with the holiday season impacting volumes. WTI is closing relatively flat at $98.90. Precious metals are also flat with gold losing 0.04% to $1,612 while silver fell 0.3% to $29.15. Soft commodities are broadly lower while copper is flat. Overnight we have the release of the UK current account and US unemployment claims.

EUR/USD is ending the Asia session at the same level as where it started some 8 or so hours ago as the smart Asian investor is more than happy to focus on the holiday period.  There was a short lived dip towards 1.3030 as the risk currencies like AUD and NZD continued to give up the gains seen during the European session and lost after the European Banks swamped the ECB for liquidity. However, as we said the risk off trading of the market has the pair closing at 1.3044.  There isn’t much in the way of data for the Eurozone during the European session for the Euro and markets to trade around, however, there is a bit of lower level US releases to help the volatility along. A break below 1.3000 should see a rush towards the old 1.2950 lows and if broken, we would not want to be the last one left holding Euro’s as we can see some massive moves coming whilst liquidity remains poor at best. If the pair were to bounce first today we can’t see it getting above 1.3155!

AUD/USD tested the topside first as the markets tried to come to grips with the amount of borrowing that over 300 European banks did with the ECB during the overnight session. 1.0110 easily capped the price during the morning and from then of the pair drifted off to find intraday sellers trying to take the pair to retest the overnight low of 1.0050.  However, with the markets focus during Asia on summer holidays, risk off trading is all the rage, well no risk at all is more correct!  Normally at this time of year the markets are more than likely to be kept within a tight range during most of the European and US sessions but tonight my money is on another wild one in a similar pattern to last nights!  However, this time we favour the downside first and a return of the price below parity on a stop hunt after it breaks the pivot at 1.0050.  Towards 0.9955 we should start to see extended range traders on the bid with stops below 0.9900 targeting a return to 1.0050.

GOLD has fallen in trade today in line with falling equity markets and a broad reduction in risk sentiment brought on by, you guessed, the European debt crisis. Gold is closing the afternoon around $1,609 and traded in a $1,606 to $1,616 range. Gold has bounced well from our first support level at $1,605 and we expect that the price will move towards $1,620 in trade overnight. In saying this, further nervousness surrounding the size of the ECB loans to the banks and the manifestation of these concerns in the credit markets tonight may precipitate a sharper fall in the equity markets overnight which could see gold rapidly fall below $1,600.  In this environment we remain very cautious and would not be initiating any new positions whilst thin holiday volumes persist which could lead to high volatility. For those looking to trade gold we would keep a close eye on support and resistance levels and trade around these levels.  Support lies at $1,598 with resistance at $1,620.

US OIL (WTI) eased marginally in trade today within a range of $98.55 to $99.18 before closing the afternoon at $98.65. It is currently sitting perfectly on resistance and if concerns surrounding Europe do not dominate headlines tonight we should see the price accelerate through $99.00. US Energy Department figures which showed that stockpiles fell by the most in almost a decade by 10.6 million barrels to 323.6 million barrels should continue to support the market as will any further sanctions against Iran.  The momentum higher has been stalled by investor concerns over the size of the ECB bank loans but there is now very strong support at the $97.50 level. Given the illiquid holiday trading conditions we would look to take oppotrtunity after excessive price moves if they occur rather than take any pre-emptive positions at this stage.  Look for support at $97.50 to hold and resistance at $99.85.


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