Positive European News Offsets Disappointing U.S. Data

Market sentiment improved markedly overnight due to successful bond auctions in Europe last week. Italy successfully sold EUR 12 billion of Treasury bills at significantly lower yields than at the previous auction while demand for Spanish debt was higher than expected prompting Spanish two year note yields to fall below 3% for the first time since April 2011. The optimism in Europe was tempered by disappointing US economic data which showed that retail sales only rose by 0.1% in December against expectations of a 0.3% rise and jobless claims rose more than expected by 24,000 to 399,000 in the week ending January 7. The Bank of England left policy unchanged and the GBP remains just above 1.5300.

ECB President Mario Draghi pointed to the falling yields at recent bond auctions as evidence that the ECB's strategy for dealing with the European debt crisis is beginning to show results. He said that the massive cash injections in the financial system are beginning to loosen up credit markets and that there were signs of economic stabilisation in the eurozone. He did not focus on the fact that the ECB's balance sheet continues to grow as banks park more mon-ey with the central bank rather than lend it out. The ECB left rates unchanged at 1% and this, in combination with Draghi's comments, propelled the EUR higher by more than a cent to 1.2846. The Australian dollar traded as high as 1.000 before falling from resistance to open up this morning at 1.0330.

Equity markets were largely lacklustre with positive news out of Europe offsetting disappointing US economic data releases. In Europe, the positive bond auction results and comments from ECB President Draghi failed to elicit much of a reaction from markets. The DAX closed 0.44% higher at 6,179 while the FTSE lost 0.15% to 5,662. The S&P 500 has closed the session 0.23% higher at 1,295. Alcoa and Caterpillar rose more than 2% while energy shares declined the most as oil fell quickly below $100.00.

Commodity prices eased on Thursday after the recent run of strong rises. WTI crude fell more than 2% to $98.80 after an announcement that a planned EU embargo of Iranian oil imports might be delayed for 6 months. Precious metals continued to consolidate with gold higher by 0.48% to $1,647 while silver is trading above $30.00 up 0.43%. Soft commodities saw significant losses with corn and wheat falling by more than 5%. Copper bucked the trend by rising 2.7%. The CRB index lost 3.75 points to close at 309.86.

GOLD continued to rise as gains in the euro helped to support commodity prices as the outlook starts to improve, especially in the US. Investors are not yet moving back into equities and there will be sometime before this happens, so gold will remain in favour and will continue to make up a significant part of investor portfolios for years to come. Equities gained in offshore trade and this helped to weaken the USD and push commodity prices higher. Gold finished US trade stronger by 0.65% at $1,650. Gold is looking very bullish at the moment and we have now confirmed the Medium-term trend is back in favour to the upside after a close above $1,642.

Volatility has fallen substantially and demand out of Asia continues to hit record levels which should see a continued push higher in the coming months even as equities recover. The euro has been one of the key support factors in recent weeks as some stabilisation in the failing currency has added upside pressure to commodities. We remain bullish in both time frames and now expect a test of resistance at $1,661 initially and ultimately a move back to $1,700 quite quickly. Support sits initially at $1,641 and below here at $1,625 and $1,600/05. Only below the latter would we be concerned so stops on longs are now trailed just under this support level form $1,580.

AUD/USD jumped sharply during the European morning Friday as the risk sentiment increased on the back of the positive bond auctions and the no change in interest rates by both the BoE and ECB. Once the 1.0315 level broke, a stop hunt took the price to the top of our expected range highs 1.0378 before quickly reversing as US data was much weaker than expected and took the shine of the commodity currencies bounce. NZD failed to see the same gains as the AUD during Europe and this had to be a factor in the pullback. The AUD price fell back to the daily lows 1.0290 before the slow afternoon saw the price slowly recover to finish well bid at 1.0336. With it being Friday the 13th and a lack of data, the Asia session could not produce anything. However, we favour a slow Asia session before a larger move during the European morning. Bottom pickers should be tested during the European morning in Sterling and Euro, which could lead to a heavy AUD. Also we have changed the short term bias as reported in Thursday’s report with the price getting into the 1.0350/80 bracket overnight!