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Currencies AUD Compass Directions Morning Report Wednesday, 11 January 2012

As European leaders ramp up their meetings schedules, prepare for further summits and Chancellor Merkel meets with the International Monetary Funds Managing Director, Christine Lagarde on further discussions over Greece, the USD and the Japanese Yen weakened and higher yielding currencies rose. Riskier currencies such as the Brazilian Real and the Australian dollar rose as much as 2% and 1% respectively against the Dollar. The EUR traded as high as 1.2819 overnight as investors hoped that the new year would bring new resolve from European leaders to tackle the debt crisis. At the open of the Asian session, the GBP trades at 1.5580 while the CHF is at 0.9490.

Speculation surrounding possible Chinese action to stimulate the world’s second biggest economy also aided investor appe-tite overnight. The release of Chinese trade data yesterday showed a drop in Chinese import growth to a two year low in De-cember and supports the case for monetary easing. Mounting speculation that China may also lower official growth forecasts is also supportive of this view and, ironically, aided investor optimism. The Australian dollar is trading above 1.0300 despite increasingly expectations of further interest rate cuts from the RBA in the wake of the weaker than expected Australian retail sales figures released earlier in the week.

Equity markets globally recorded a strong session overnight with US markets rising to five month highs. The S&P 500 has closed 0.89% higher at 1,292 with all 10 industry groups on the index rising as commodity, financial and industrial stocks recorded the biggest gains. Earlier in Europe, the DAX surged 2.42% to 6,163 while the FTSE gained 1.5% to 5,967. The Stoxx Europe 600 Index gained almost 2% as BMW AG and Daimler AG rose while English retailers gained on better than expected holiday sales from Debenhams, the U.K.’s second largest department store chain.

Commodity prices surged overnight as speculation surrounding easing in China ramped up demand. WTI Crude oil gained 0.88% to $102.20 with geopolitical tensions still building over Iran. Precious metals continue to gain as the USD weakened with gold rising 1.64% to $1,634 while silver has regained the $30.00 level rising by more than 4%. Soft commodities contin-ued to rise with cocoa futures soaring as much as 10% as dry weather threatens to damage crops in Africa. Copper gained almost 3%. The CRB index rose more than 1% closing higher by 3.92 points to 315.44. Today look out for UK Trade Bal-ance, US Beige Book and Crude Inventory figures.

GOLD posted solid gains in offshore trade as both European and US equity markets gained on increasing optimism in the US economy and the potential for easing in the Chinese economy. We are not seeing equities move higher on big volume and it is clear that investor are remaining cautious and sidelined for now and still putting their money to work in the gold market. The recent stabilisation in the Euro helped on the night and pushed prices higher by 1.55% at $1,632. Gold prices are starting to look very bullish again and as volatility declines we are seeing investors return to the buy side. We have one major hurdle to overcome in the short-term and this is resistance at $1,640/42 which has capped twice so far in recent trade. A break through here and we should see accelerated gains targeting $1,700 initially and then $1,750. Major MT resistance remains up at $1,800 and if this level were to be breached then $2000 is clearly on the cards very quickly. Support remains firm down at $1,600/05 and stops should remain just below $1,590 for now. Only a breach back below $1,564 would have us sidelined and concerned about a potential trend reversal.  If we see stabilisation on the Euro and decreasing volatility in Gold then prices should extend towards $2000 in the next few months.

AUD/USD has managed to grab onto the positive news and data releases of the last 24 hours and rally to meet pivotal offers at 1.0350.  The move started during yesterday’s Australian morning with the better than expected Building Approval numbers reaching 8.4% after the previous months –10.7%! Alcoa’s positive outlook for 2012 helped boost commodity related currencies across the board during the US morning with this and the positive US equity markets giving the AUD most of its support. There is a lack of data for the Asia region today and with the positive lead of the US markets we can’t rule out a retest of the 1.0350 level during the next 8 hours. However, Australian Corporate’s that missed the boat over the Australian holiday period should be seen hedging short term import risk during the morning session. A dip back towards 1.0280 is our favoured option but anything outside of 1.0280/1.0350 looks unlikely for now! However, a limited sell on a possibly break below 1.0280 looks a good opportunity!


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