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Currencies AUD Compass Directions Tuesday, 17 January 2012

After downgrading nine European nations including France on January 13, Standard and Poor’s announced that it will also cut the rating of the European Financial Stability Facility from AAA to AA+. The news offset a relatively successful French bond auction which saw yields fall on one year notes fall from 0.454% at a January 9 auction to 0.406%. It appears that most investors had already priced in a cut in ratings for France and the reaction of investors in the first trading session after the release of the mass downgrades was rather muted. Germany is now the only eurozone nation with a stable AAA rating. The EUR has failed to moved much from 18 month lows and opens the Asia morning trading at 1.2660.

The focus this week for European leaders will be to address the mounting criticism of their handling of the debt crisis by delivering new fiscal rules and work out a solution for Greece as the rescue plan for that nation flounders. The discussions surrounding Greece and the reduction of the debt burden re-main a strong focus and will be an important tests in the eyes of international investors. Pimco’s Bill Gross has already stated that a Greek default is very likely. There was speculation last night that the ECB acted to buy Italian and Spanish bonds. In other currencies, the GBP is trading at…while the Australian dollar continues to hold up well at 1.0300.

With the Martin Luther King holiday in the United States, investors were focussed largely on Europe and it was somewhat of a surprise to see a very muted reaction to the S&P downgrade of a number of eurozone nations including France. Although US markets were closed, S&P futures did record a modest rise as the market awaits results from Wells Fargo, Citigroup and Microsoft this week. In Europe, after initial weakness, the bourses there have closed higher with the DAX gaining 1.25% to 6,220 while the FTSE rose 0.37% to 5,657. Carnival, the world’s largest cruise ship operator, fell 14%, after one of its ships struck rocks and capsized off the coast of Italy.

Commodities futures were largely closed fro trade due to the US holiday. WTI crude rose 1% to above $99.60 as the war of words escalated over the Irani-an situation. Precious metals are higher with gold gaining 0.8% to $1,644 while silver is trading just below $30 up 1.43%. Soft commodities were largely closed for trade while copper gained 1.07%. Today, we have the release of the high impact Chinese GDP data amongst a series of other releases including retail sales and industrial production. Overnight, we have UK and European CPI, a speech by BOE Governor King and the Canadian Rate Statement. The Chinese data will have a strong impact on the markets this week if they show a marked slowdown in the world’s second biggest economy as we expect.

GOLD moved higher in offshore trade as sentiment picked up, especially in the Euro region with bond yields falling in France after a successful bond auction. The USD steadied which assisted a rise in precious metals prices but all in all it was a quiet night with the US off on holidays. Gold finished offshore trade stronger by 0.80% at $1,643. A very quiet night for precious metals last night as most of the big moves come out of the US and the liquidity just wasn’t their as we had a US holiday. Prices remained well bid throughout the session and are definitely looking prone to further gains. Support down at $1,625 was never in doubt and this level remains short-term support and below here key support is now located at $1,600/05. So depending on the timeframe depend son where stops should be placed. Longer-term holders should consider stops under $1,580 for now. A move looks set to test $1,662 and if we get through here then we should continue to grind back towards $1,700. China data key today so any weakness after this data should be an opportunity to get long.

AUD/USD was one of the best performing currencies during the last 24 hours as the better than expected Australian Home Loans data started the ball rolling and with a lack of liquidity around the markets due to the US long weekend the price managed to get back above 1.0300 and posting a 1.0335 top during the US afternoon.  This bounce hasn’t surprised us and yet again we are seeing it as another opportunity to re-enter a short term sell position. The price has already moved back to 1.0306 to close out the US session with the ratings agency S&P taking any positive spin out of the markets with a downgrade to the EFSF Bailout Fund from AAA to AA+.  There is a lack of Australian data, however, with the Chinese GDP release today expect some movement for the AUD. The AUD looks to be on the knifes edge of something and this could be the tipping point. An    improvement in Chineawill see the bulls take AUD above the pivot 1.0370 whilst a lower number will give the bears what they have been waiting for, more Doom and Gloom with parity around the corner.


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