Compass Directions: Morning Report for February 20, 2012

Markets have been buoyed by signs that the Greek aid package will be passed by euro-area finance ministers as early as today as Germany became more supportive of the bailout package over the weekend despite the war of words over various issues last week which drew stinging comments form the Greek President over German “insults”. Germany has indicated that is is now willing to support a joint approval of both the Greek aid package and the debt swap for private bondholders. The mar-ket is clearly positioning itself for good news. We are less confident that a deal will be announced today and will be looking for opportunities to sell the current rally. The EUR has surged in early Asian trade to as high as 1.3195.

Aiding the positive sentiment today was the move by China over the weekend to cut its bank's reserve requirements to arrest falling exports and a cooling housing markets which saw prices fall in 47 out of the 70 biggest cities in January. The move to reduce capital reserve requirements by 0.5% is intending to promote more lending and economic growth. The Australian dollar has benefitted from the developments over the weekend and has surged above 1.0780 in early morning trade.

Equity markets recorded gains across the globe on Friday. Asian markets rose by more than 1% with the Nikkei gaining 1.6%. European bourses gained as it appeared that the Germans are now more supportive of a Greek bailout. The DAX rose 1.42% while the FTSE gained 0.33%. The S&P 500 closed within 0.2% of last year's highs as the 2012 rally continues. All 10 industry groups in the index rose with energy and technology stocks recording the biggest gains as the index closed 1.4% higher for the week and 0.23% higher for the day.

Commodity prices closed higher on Friday and look set for further gains today on renewed optimism over the Greek refi-nancing package. The CRB closed higher by 0.98 points to 317.39. WTI crude continues to gain strongly, higher by 0.91% to $103.20, as Iran stopped oil exports to the UK. Gold and silver remain relatively subdued. On Friday gold lost 0.14% to $1,726 while silver fell 0.46% to $33.30. Soft commodities were broadly higher with wheat and wool making the biggest gains. Copper lost 2.17%.
GOLD continues to very much trade as we expect between a range of $1,717 to $1,735 on Friday and continues to provide the range trader multiple opportunities to benefit from its recent price action. Gold remains stuck in a broad $1,705 to $1,750 band while trading between a $1,715 to $1,730 band for most of the past two weeks now. More of the same can be expected until some resolution or lack of in the Greek refinancing debacle is announced. We are beginning to suspect that a break of the recent ranges will occur in the next day as there is mounting expectation of some sort of announcement by Eurozone finance ministers as early as today in relation to the Greek situation. No matter what happens today, we expect the market to move significantly as a lot of pent up tension has been building in recent weeks and volatility fell. Continue to buy on dips towards $1,710 and sell on rallies to $1,740 with
stop losses outside of recent ranges. This strategy has served us well for now and we see no reason for a change to this.
AUD/USD weakened all day Friday as the market was clearly effected by the weak Chinese Copper reports and squaring ahead of the USA long weekend. Not even a positive Euro on the back of expectations that the European Finance Ministers we to approve the next round of Greek Funding as early as today was enough to stop the decline. Support 1.0685 was enough to stop the
momentum during the late US morning and all signs were pointing to a weaker Monday morning open for the local markets. More positive Greek funding reports over the weekend and news that the PBoC had cut its Lending Ratio RRR by 50bps is a clear sign that the Chinese want to stop the current slowing of manufacturing, which is good for our resources. The price has shot up from the opening 1.0725 to be closer to 1.0800 at time of writing. Its all quiet on the data front and with the USA long weekend, liquidity will be thin. Intraday traders look to have the better risk reward selling into the current bounce with a focus towards a drop to 1.0700.