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Currencies AUD Compass Directions Morning Report Friday, 6 January 2012

The surge of the EUR towards 1.3100 only a few days ago was indeed very short lived as the common currency plunged to it low-est levels in 15 months against the USD and to 11 year lows against the Japanese Yen. Despite stronger than expect US labour market data, European debt concerns continue to weigh on investor sentiment. Credit rating agencies continue to warn of reviews and downgrades of various countries within the eurozone and there is mounting speculation that France will soon lose its AAA rating which saw bonds yields rise at the latest bond sale. The EUR fell below 1.2800 to as low as 1.2768 overnight.

The heavy selling of the EUR was also aided by a Financial Times report that said that Spanish banks would need to come up with extra capital to cover rising bad loans while the Spanish Finance Minister indicated that banks would have to fix up their balance sheets without Treasury assistance. The Australian dollar fell more than a cent to as low as 1.0230 overnight as the plummeting EUR weighed on the risk currencies. Furthermore, traders took the opportunity to sell the currency after the release of a lower than expected trade surplus as exports of resources unexpected slowed. The trade surplus for November was reported at AUD 1.38 billion versus expectations of AUD 1.65 billion.

Global equity markets were slightly lower or largely unchanged despite the volatility in the currency markets. European bourses closed weaker with the DAX down 0.25% to 6,096 while the FTSE lost 0.78% to 5,624. France’s CAC incurred the biggest losses falling 1.53% to 3,145. The S&P 500 was buoyed by better than expected employment data which helped to erase earlier losses triggered by lowered profit forecasts by the retailers such as JC Penney and Target. US ADP Employment surged by 325K against expectations of a 178K rise and the S&P 500 has closed the session 0.29% higher at 1,281. There is a widening gap between the performance of the American economy and the troubles faced by the Europeans. Economic data is beginning to show that the US is unlikely to enter another recession while the situation in Europe remains dire.

Commodity prices, with the exception of precious metals, broadly fell overnight WTI crude fell sharply by more than 1.4% to $101.75 in the last hour of trade after the US Energy Department reported a surprise increase in stockpiles of 2.48 million barrels to 220.2 million barrels last week. Precious metals continued to consolidate and rise after the UK Defence Secretary warned that his nation may take military action if Iran follows through on its threat to block the Strait of Hormuz. Gold rose 0.59% to $1,622 while silver gained 0.68% to $29.30. Soft commodities broadly fell with wheat, coffee and sugar falling more than 3% while copper has lost 0.5%.

GOLD continue to consolidate and rise as we had expected rising from a low below $1,600 early yesterday morning to as high as $1,626 overnight. It is opening the Asia session above $1,620 and the major resistance at $1,640 in its sights. A break of this level will give us cause to change our medium term bias on gold back to bullish. A break of $1,640 will have confirmed a bottom is in place after the failure of gold to break below key support at $1,535 in the past fortnight. The fact that gold continues to rise in the face of a resurgent USD is an extremely bullish signal in our view.  Gold is sustaining its longest rally in 10 weeks on the back of comments by the UK Defence Ministry that it may take military action against Iran if that country carries out its threat to block the vital Strait of Hormuz crude supply line. Gold’s less high profile cousin, silver, also made gains to trade at $29.30.  We expect that gold will continue to outperform the USD. Look for an imminent test of $1,640.

AUD/USD fell more than 1% to as low as 1.0230 overnight after trading as high as 1.0375 yesterday. As we had expected the currency failed to hold at lofty levels towards 1.0400 and was helped lower not only by the plummeting EUR but the worse than expected trade balance figures which saw a narrowed surplus as exports of resources fell in the month of November. The Australian dollar has so far been insulated from further falls by stronger than expected US data. Although we expect continued strength in US economic readings, we expect that an accelerated fall in the EURO and a slowing in China will precipitate an fall below parity within the next month. A data free day in Asia today should see the currency range bound between support at 1.0220 to 1.0330.  A break of 1.0220 today will see a very quick move to test support at 1.0180.

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