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Currencies AUD Compass Directions Monday, 16 January 2012

Standard and Poor’s has cut France’s AAA credit rating and the credit rating of eight other eurozone nations. S&P’s Managing Director of European Sovereign ratings has said that European leaders are divided and are falling behind in their response to the debt crisis. Austria also lost its AAA rating while Italy, Portugal, Spain and Cyprus had their ratings cut by two notches. The cut in credit ratings may reduce the ability of the bailout fund to raise capital to finance aid and exacerbate the region’s troubles. The EUR fell to its lowest levels since August 2010 at 1.2624 today and, not surprisingly, is the worst performing currency so far this year. The common currency is still well above its average of 1.2050 since its inception and clearly has much more room to fall. Pimco’s Bill Gross hasn’t helped with the sentiment in Europe by saying that a default in Greece is imminent.

The elephant in the room, China, may also cause dismay in the markets this week as GDP may rise at its slowest pace since the second quarter of 2009 amid increasing signs that that the world’s second largest economy is slowing with exports rising the least in two years and inflation easing to a 15 month low. Furthermore, the International Monetary Fund is due to release its revised global projections this week which are expected to show zero growth in Europe and a significant reduction in the fund’s most recent estimate of 4% for the global growth in 2012. The Australian dollar opens the week down recovering the 1.03 level in Europe after trading as low as 1.0250 during the Asian session.

Asian equity markets recorded a poor start to the week as the move by S&P to strip France of its top credit rating weighed on investor sentiment. The Nikkei fell 1.43% to 8,378 while the Hang Seng lost 1% to close at 19,012. However, the underlying trend in US corporate earnings remains good as the US Citigroup Economic Surprise Index, a measure of how much reports exceed or miss economists experts rose to a 10 month high this month. Today, the US is on holiday. Early in Europe, the markets are relatively flat as the markets await the results of the latest bond auction in France where it will look to raise as much as EUR 8.7 billion. Tomorrow, the EFSF will look to raise EUR 1.5 billion.

Commodity prices recovered from the falls experienced last week. WTI crude prices rose by more than 0.7% to $99.40 as Iran said that a blockade of crude supplies through the Strait of Hormuz would cause a shock to the markets that “no country” could handle. This followed warnings from Iran’s OPEC Governor that any embargo of Iranian oil would be a “dangerous political game. Precious metals rose with gold gaining 1% to $1,646 while silver finished 1.4% higher at $29.92. Soft commodities were mostly closed for trading while copper gained 1%.

AUD/USD performed extremely well for the last 4 weeks since finding its support level at 0.9860 on Dec 15. However given Friday’s ratings downgrade of the Eurozone nations, the Aussie may use this as an excuse to retrace back towards 1.0230 in the very short term (50% retracement from 1.1079 to 0.9386).  Immediate resistance is seen at 1.0380 with short term stops above this level.  If this happens and momentum continues we may see 1.0432 as a good opportunity to go short.  Until Tuesday’s key GDP out of China, AUD/USD may range trade between 1.0348 and 1.0230.  In the meantime note the symmetrical triangular formation taking place – breakout trades may be fruitful with tight stop losses.

As noted above EUR/USD has an average rate of 1.2050 since its inception so Euro may still have a few more hundred pips on the downside to go supported by negative fundamentals and that’s not hard to find.  Our view is to sell on rallies with tight stops above the resistance trend line.  For the immediate future R1 and R2 is seen at 1.2680 and 1.2720 respectively.  For the strong hearted, support may be seen at 1.2586 (21 Aug 2010) to form a double-bottom but you may have to bite the bullet with that trade.  With the US market celebrating Martin Luther King Jr’s birthday and as the market awaits for more reasons to sell the Euro we may see the range for the US time zone to be 1.2580 – 1.2680.

GBP/USD has been declining consecutively for the last 4 weeks and one wonders where it will stop, at least for the short term. If last week is anything to go by this could be at 1.5230.  Again with the US session not in play due to the holiday GBP/USD may take a breather today to range trade between 1.5230 – 1.5330.  On an hourly chart Cable seems to claw back well after initial sell off which suggests that players are not giving up on the Pound as yet.  However on the daily chart, it seems more prudent to sell on rallies…just like its neighbour.

USD/JPY looks solid at 76.60 due to intervention threats by Japan and the top side limited by events of the world.  Perhaps opportunity could be gain by going with the flow and trading like a beginner.  Until new information is known and if we must trade this pair, look at support at 76.50-76.60 and resistance at 77.20.  Perhaps like many patient traders staying on the sideline may be a good idea for this pair for the moment and look for break outs on the downside instead (even with the threat of intervention).