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Currencies AUD Compass Directions Morning Report Monday, 9 January 2012

The European common currency continues it rapid decline in the first week of trade in 2012 on the eve of the first summit meeting for Chancellor Merkel and President Sarkozy this year. There is now increasing urgency for the pair to finalize the plan and rules surrounding the “fiscal compact” for members of the eurozone that was announced at the December 9 summit. Their self imposed deadline for the new guidelines is only three months away. The future of the common currency has never face bigger threats as the EUR slumped to as low as 1.2670 before opening this morning at 1.2690 already having fallen close to 10% in the last 6 months of 2011.

Spanish bonds yields rose by the most in almost 17 years last week and the EUR will face serious tests this week as bond sales are scheduled for Spain, Italy, Austria, Germany and the Netherlands. Tomorrow’s summit will be quickly followed by a round of talks involving eurozone leaders before another summit on January 30. Meanwhile, in relation to the ongoing negotiations over the forgiveness of Greek debt, the IMF’s chief economist, Olivier Blanchard made comments that the haircut for Greece “could have to be larger” than expected. The Australian dollar continues to ease as the Euro falls and opens this morning at 1.0200.

Equity markets managed to close lower in Friday but still managed gains for the first week of trade in 2012. The S&P 500 man-aged to record its second best weekly start to the year since 2006. However, the index lost 0.25% for the day to close at 1,278 despite much stronger than expected US non-farm payrolls figures which showed an increase of 200K jobs against expectations of a rise of only 150K. The unemployment rate fell to 8.5%. Earlier in Europe, the DAX closed lower by 0.62% to 6,058 while the FTSE managed a modest gain of 0.45% to 5,650.

Commodity prices managed modest gains on Friday with the CRB index closing 0.94 points higher to 309.48. Crude oil continues to consolidate losing slightly by 0.25% to $101.55. Precious metals weakened with gold falling 0.2% to $1,617 while silver lost 2.1% to finish as $28.68. Soft commodities were mixed while the copper price rose 0.25%. Today, look out for the high impact Australian Retail Sales and New Homes Sales data releases.

GOLD saw marginal losses in offshore trade on Friday in the US as profit taking set-in after a strong runup from the low $1,500’s has been halted before major resistance. We also saw the Euro continue to weaken and equities finished out the week slightly in negative territory which left commodities directionless throughout the session. Gold finished US trade weaker by 0.20% at $1,616. After a false break of major support down at $1,532 over the holiday period we have seen a solid move back above $1,600 and above trend support which has seen strong buying interest return. Volatility has declined and this is helping investors return to the Gold market as European problems mount. In the short-term we can see resistance at $1,625/30 with a breach here targeting major resistance at $1,642. This is the key level to watch right now as a break here should see solid follow through buying to take us back into the $1,700-$1,800 band to start. We become MT bulls again through $1,642 only. Support is located at $1,593-$1,600 and should hold today if any weakness is seen. Stops on longs would still have to reside lower down for now at $1,560 until we see a push through $1,642 where stops could be trailed up to $1,590. We wouldn’t buy at current levels but would prefer to buy at $1,600 or on a break through $1,642.

AUD/USD has fallen in the face of the worsening debt crisis in Europe and the plummeting common currency. It traded in a 1.0185 to 1.0280 range on Friday and has now fallen for the third consecutive day of trade. It opens this morning at 1.0200 and looks likely to continue its decline. A strong US payrolls figure provided some support for the currency before a resumption of the decline as US equity markets failed to rise on the back of the data. The market continues to price in a greater than 75% chance of a rate cut in both February and March and as long as the pressure remains to the downside for rates in Australia, the AUD will more than likely ease to below parity on the back of narrowing interest rate differentials. Australian interests have much more room to fall then interest rates in any other developed nation. Today, looking for opportunities to sell on the break of support at 1.0150 or near resistance building at 1.0230. Keep an eye on the retail sales data which may surprise on the downside.


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