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Currencies AUD Compass Directions Morning Report Thursday, 29 December 2011

News released overnight that the European Central Bank’s balance sheet has grown to a record size has put an end to the Christmas cheer prevalent in the markets over the past week. The ECB’s balance sheet now sits at a record EUR 2.73 trillion after it recently lent record amounts to financial institutions last week to prevent credit markets seizing. The ECB’s balance sheet is now EUR 553 higher than it was three months ago. The EUR plummeted below 1.3000 to trade as low as 1.2930 with the USD staging a broad rally.

Growth in the eurozone has been forecasted by the ECB to grow at only 0.3% next year against a 1.6% increase this year. Policy response by European leaders and institutions has been varied but has largely failed to address investor concerns surrounding the debt crisis. The ECB under the leadership of Mario Draghi is now clearly opposed to the policy of buying more government bonds and is now more focused on providing the financial system with unlimited cheap loans. The success of the recent Italian bond auction was not a surprise given the amount of money that the ECB has pumped into debt markets. However, we fear that the new year will not hold much good news for the Eurozone. The Australian dollar plunged to as low as 1.0070 overnight amid the renewed European concerns.

Equity markets have broken a Christmas rally with the S&P 500 ending a five day rally on more European concerns. Despite record liquidity injections by the ECB, banks are still reluctant to lend and this has heightened investor concerns over a freezing of credit markets. The S&P 500 slumped 1.25% to $1,250 with Bank of America shares falling more than 2.5%. Earlier n Europe the DAX fell 2.01% to 5,771 while the FTSE remained largely unchanged at 5,507.

Commodity prices slumped overnight with the CRB index losing 2.78 points to 305.49. Crude oil ended its Christmas run which saw it trade above $101.50 to close the session down 1.8% to $99.52 as the European debt crisis outweighed potential supply disruption in Iran. Precious metals plummeted with gold losing more than 2.3% to $1,558 while silver plunged almost 6% to just above $27.00. Soft commodities were mixed with cotton surging while cocoa fell. Copper lost 1.5% overnight. We have a data void day but thin liquidity may yet see some volatility in today’s session.

The COMPASS DIRECTIONS team wish you a wonderful holiday season. We wish you and your family all the best in the New Year.
Stay safe and be happy!

EUR/USD plunged overnight as investors stood in awe of the size of the recent increases in the size of the ECB’s balance sheet as the bank moves to prop up the financial system with more cheap funding. The ECB’s balance sheet now approaches EUR 2.75 trillion after having increased by more than half a trillion euros on the past three months alone.  The news could have been interpreted as a positive in that the ECB is taking extraordinary steps to prevent a crisis in the European banking sector.  However, investors decided to sell on the news and the EURO plunged below 1.3000 to trade as low as 1.2910 overnight. The common currency opens the morning not much higher at 1.2930. After having watched the biopic “The Iron Lady” about former UK Prime Minister Margaret Thatcher, it appears her staunch opposition to her nation’s inclusion in the common currency has been vindicated more than two decades after she left office. Look for support at 1.2880 and resistance at 1.2970.

AUD/USD not surprisingly fell overnight as broad weakness in the equity and commodity markets saw it fall to as low as 1.0070 after having traded above 1.0200 yesterday. It opens the Asian session just below 1.0100.  The resilience of the little Aussie battler continues to confound us but we believe that another breach of parity is inevitable.  The AUD is now trading at very high levels against both the EUR and the GBP. We will certainly be seeing some heightened hedging activity by Australian corporates looking to take advantage of these current high levels in the AUD crosses. Profit taking on AUD crosses on weigh on the currency as traders and speculators will look to take advantage of the recent weakness in the currency to take the currency lower in illiquid conditions. On the break of parity, we may see a very rapid decline to 0.9500. On the other hand another strong release of US economic data in tomorrow’s session will act to stabilise the currency.

GOLD Traded in a $1,549 to $1,593 range overnight and has opened up this morning at $1,556. Weakness in the equity markets brought on by renewed concerns over Europe and a surging USD has seen the gold price fall almost 3% to sit just above pivotal support. A break of critical support at $1,530 will see a rapid and sustained fall that has the potential to mark the beginning of the end for the bull run in gold. Silver has now fallen more than 45% from its year’s high in April as a resurgent USD has impacted on precious metals prices. We expect that gold will hold support at $1,530 and stay range bound between $1,530 and resistance at $1,640.  Only a clean break of these levels will give us a clear indication of what lies ahead. We are now neutral in our outlook until a clear pattern emerges. Given low liquidity and volatile conditions we will remain on the sidelines. Look for support at. $1530 and resistance at $1,580 to hold.

US OIL (WTI) after having rallied strongly above $101.50 in a Christmas rally , has fallen back below $100 to trade in a $99.10 to $101.73 range overnight. It opens the morning just above $99.50. A surging USD and concerns surrounding the size of the liquidity measures the ECB has had to take to prevent gridlock in the European financial systems has seen broad selling across all asset classes overnight. Generally illiquid conditions have also contributed to the size of the moves. Oil prices were also depressed by reduced concern that Iran will block the vital Strait of Hormuz supply route amid increasing pressure from Western powers. The Brent – WTI differential is now at the lowest levels since January this year after falling below $8.00 in trade yesterday. We remain bullish crude for now and look for a resumption of the upward trend after another imminent breach of $100.  Look for support at $98.50 and resistance at $101.00.


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