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Currencies AUD Compass Directions Morning Report Monday, 12 December 2011

Even as the Bundesbank ruled out an expansion of the role of the European Central Bank in the fighting of the spread of the European debt crisis, leaders at the latest EU Summit hailed the latest accord designed to tighten fiscal policy as the way to bring the region out of the debt crisis that has stricken the region for the past two years. The accord calls for tighter budget rules while providing an additional EUR 200 billion for the rescue package. Chancellor Merkel has declared that the accord will lead to a “lastingly stable euro” and that a “breakthrough to a stable union has been achieved” even as the United Kingdom chose to remain outside the new framework. The EUR rallied on the new pact and opens the session today slightly higher at 1.3370.

The response to the new accord is once again mixed with speculation already mounting that the deal will be difficult to implement. The EUR has already pared some of its gains while yields on Italian and Spanish bonds rose. UK Prime Minister David Cameron did not back the reforms leaving the members of the Eurozone to negotiate amongst each other. The changes will not be reflected in the EU rules given Britain’s lack of support. Even solidarity in the Eurozone members seemed fragile as the Austrian Chancellor made comments in a newspa-per interview that the accord lacked “firepower”. The Australian dollar had a roller coaster session on Friday and opens the week at 1.0200.

US stocks gained on Friday. The University of Michigan index of consumer confidence increased to 67.7, ahead of forecasts, from the pre-vious month’s reading of 64.1. The S&P 500 gained 0.9% to 1,255 as the continuing run of good US economic data greatly reduces the risk of a double dip recession there. GE rallied almost 5% after raising its quarterly dividend while DuPont fell after cutting 2011 earnings fore-casts. Earlier in Europe, the bourses gained on hopes of a good result from the EU Summit. The DAX gained 1.91% to 5,987 while the FTSE rose a more modest 0.83% to 5,529. Domestically, we have the release of the high impact home loans and trade balance data today.

Commodity prices were dragged lower by steep falls in soft commodities and the CRB index lost 1.52 points to 306.43. WTI Crude oil ral-lied 1.09% to $99.41 on the new European accord and US consumer confidence which rose to a six month high. Precious metals firmed with gold higher by 0.2% to $1,716 while silver gained 2.27% to $32.25. Soft commodities such as wheat and corn plunged as the US De-partment of Agriculture increased forecasts for global reserves. Copper gained 1.64% as investor confidence in the global economic envi-ronment improved.

USD/JPY squeeze higher during the early London morning as the USD seemed to be the safe haven favourite whilst the reports out of the EU summit were more towards the negative than the positive. However, the normal selling seen on bounces from Japanese Corporate’s and cross Yen flow took the pair back towards 77.50 as the markets changed the risk sentiment to positive as the EU summit agreed to put another $200bio in the IMF pocket. In the end the pair moved back to its happy place at 77.65 to close out the week and that is where it opens Asia.  There is some very low level data releases that are better left unsaid today as we focus on another breakout like that which was seen during last week. It looks a better chance at the moment that the next move will be down again just because we haven’t had that majorly long lead time of boring trade which had controlled before. A break below 77.50 should signal a start but if 78.00 break on the topside watch the USD shorts bail.

AUD/USD continued to tank during the London morning as the reports out of the EU summit were not positive to start with, not all of the 27 member states keen on the reforms. Once the pair broke the Asia 1.0090 low stop hunting quickly took it to 1.0050. After that the positive news started to flow with AUD following the Euro lead and by the end of the US week the pair was looking very buoyant at 1.0225. Early Monday morning selling of Sterling and Euro has also been seen in the AUD.  Today we have Home Loan numbers and Trade Balance being released at 11.30am local time. Home Loans are expected to be close to zero after last months +2.2% and a higher number doesn’t look unlikely as there current looks a scramble to buy because of an end to the NSW stamp duty discounts for first home buyers. In any case it looks unlikely to see any major moves until Europe starts to enter. A possible move below 1.0160 could spark some new shorts with 1.0105 unlikely to break today.


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