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Currencies AUD Compass Directions Morning Report – Wednesday, 15 February 2012

European officials continued to apply pressure on the Greek government yesterday to deliver legislated austerity cuts whilst still insisting that default is not an option. Both Merkel and Sarkozy have said that Greece will not be allowed to fail so we wonder if the Greeks really care what anybody is demanding? However, the markets were unsettled by the cancellation of a meeting between finance ministers due to-day in Brussels and they will instead hold a teleconference to discuss the Greek situation as Luxembourg PM Juncker said that he was not convinced that the leaders of the Greek coalition parties were committed to the austerity program. The next meeting is now scheduled for February 20 and for the first time the possibility of an exit of Greece from the eurozone has entered the mainstream political debate. The EUR fell yesterday to as low as 1.3080.
It wasn’t all bad news for Europe as Italy successfully sold EUR 6 billion of bonds at lower costs as investors largely ignored a downgrade of the country’s credit rating by Moody’s. However, there is no a storm brewing on another front that cause chaos in financial markets. The rising wave of assassinations and retaliations between Israel and Iran is threatening to escalate to a flash point and plunge the nations into a disastrous military conflict. Israel is upping the ante in relation to its protests against Iran’s nuclear programme and has not ruled out the possibility of a military strike. At the same time, threat assessments from US intelligence sources indicate that Iran is now more willing to conduct attacks against US interests. USDJPY rose strongly yesterday after the BoJ increased its asset purchase fund from JPY 55 trillion to JPY 65 trillion. The Australian dollar fell to as low as 1.0628 yesterday.
Equity markets closed yesterday lower as the Greek tragedy dragged on and US economic data disappointed. In Asia, stocks were mixed while European bourses fell with the DAX losing 0.15% to 6,728 while the FSTE lost 0.10% to 5,899. The S&P 500 has closed 0.09% low-er at 1,350 with commodity and financial shares leading the falls in the indexes 10 groups. US retail sales figures only rose 0.4% against median expectations of a 0.8% and investors are beginning to worry about the so far one way traffic in equity prices this year.
Commodity prices eased only slightly yesterday despite increasing worries over Greece and tensions rising in the Middle East. The CRB index closed 0.11 points lower at 313.95. WTI crude has held onto gains to close flat for the session at $100.90. Precious metals continue to ease with gold lower by 0.41% to $1,718 while silver has lost 0.85% to $33.40 . Soft commodities were mixed with cocoa rising more than 3% while coffee lost almost 4%. Copper is down 0.86%.


GOLD continues to trade the range between $1,712 and $1,728 yesterday and we expect more of the same today. The $1,710 to $1,750 channel remains rock solid despite the escalation of tensions in the Middle East and the continuation of the Greek tragedy. As the price remains trapped in this tight channel we are hearing of building stop losses just outside of the current range. The possibility of a breakout in the gold price has increased significantly as the situation between Israel, the West and Iran looks likely to deteriorate. This breakout will be higher and will see prices escalate quickly through $1,800 and then the all time highs on the way to $2,000 an ounce before the middle of the year. However, a short term fall to support at $1,705 cannot be ruled out as the Greek situation lingers and the possibility of a sharp correction in equity prices remain. We will remain neutral in the short term and continue to trade recent ranges until a solid break of $1,755 occurs.


AUD/USD bounced off the 1.0665 support during the change over between Asia and European trading, with the pair taking the morning European positive spin on the back of Better German data as the pair recovered to 1.0730.  However, the bears were to win out as Moody’s downgrade some European sovereigns and then reports that the European Finance Ministers meeting was to be delay being the final straw early in the US morning. Weaker than expected US Retail Sales numbers didn’t help the cause as equities fell and from there the writing was on the wall for the Aussie. We close the US session with the pair having just bounced off 1.0625 support.  The change of late to the double bearish bias looks to have been timely and now we are starting to see the rewards. A break below the past 1.0570 support will have the rest of the markets following the bearish lead and if the European crisis builds again we could be talking much lower numbers again.  However, at this stage 1.0350 is the first major target.


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