ECB Reports Deposits From EU Banks at Highest Levels

It didn't take long for the holiday cheer to wear off for the common currency as the EUR fell below 1.2900 overnight as concerns over the debt crisis once again took centre stage as investors and traders returned from their holidays.The EUR has fallen over almost 6% in the last six months and fell below 100 against the Japanese Yen. The currency was sold down on slowing inflation in Europe and an announcement by Italian bank Unicredit that it would raise EUR 7.5 billion in a new share listing to prop up its capital position. Unicredit had offered the shares at an astounding 43% discount! The EUR opens the Asian session at 1.2940. The Dollar index rose 0.5% to 80.077.

The ECB reported that deposits it held from European banks had risen to their highest levels since the introduction of com-mon currency at EUR 453.2 billion. The fact that banks are depositing excess cash with the ECB at overnight cash rates of 0.25% rather than lending it out at higher rates is an increasingly worrying sign. There was also speculation overnight that the Spanish Treasury had to give a verbal guarantee to convince a lender to advance funds to make a EUR 123 million pay-ments. There is now mounting speculation that Spain will imminently apply for loans from both the European rescue fund and the IMF despite official denials. Hungary continues to negotiate with the IMF and the EU on financial assistance.

US equity markets barely moved as lower than expected factory orders and concerns over the capital adequacy of European banks offset better than expected car sales. The car industry recorded its best year since 2008 and stocks such as Ford rose more than 2%. The S&P 500 closes the session up only 0.02% at 1,277. Earlier in Europe, the bourses fell with the DAX losing 0.89% to 6,112 while the FTSE lost 0.55% to 5,668.

Commodity prices were relatively stable after the strong rises seen in the previous session with the CRB index gaining only 0.43 points to 313.80. Crude oil fluctuated near 8 month highs with the announcement by the EU that they were preparing to impose sanction on oil imports from Iran offsetting European consumption concerns. WTI crude is trading 0.3% higher at $103.25. Precious metals were mixed with gold gaining 0.87% to 1,614 while silver lost 1.43% to $29.15 after having ral-lied from $26.30 to almost $30.00 within a week. Soft commodities were broadly lower and copper has reversed yesterday's gains falling by 2.71%. Look out for the Australian Trade Balance data today.
GOLD has consolidated above $1,600 after trading in a $1,592 to $1,619 range overnight and opens this morning at $1,611. That fact that it held so well above support around $1,590 despite a surging USD and the plummeting EUR gives us cause to change out short term bias to bullish. We now expect an imminent test of $1,640 to occur and a close above this level will see us turn bullish in both the short and medium term. There is still speculation surrounding the diversification out of the USD and into gold by various government and semi government organisations across the Asian region and, in particular, China. We expect that this trend will continue throughout 2012 and that this will result in a significant and swift upswing in the price to closer to $2,000 by the middle of the year. We expect that gold will continue to outperform the USD. For today, look for support at $1,605 to hold and a test of $1,620 to occur.

AUD/USD continues to surprise us with its remarkable resilience despite the significant fall in the EUR over banking sector concerns and speculation over Spain. We expect that the Australian dollar has held current levels through largely a lack of interest and low liquidity. Look for a move lower today especially given the recent news release by the BBC which has reported that the China National Audit Office has uncovered almost $100 billion of irregularities in local government loans. The bad loans situation in China is becoming increasingly the focus of attention for those looking for cracks in the Chinese economic miracles and if this story begin to gain momentum it will certainly lead to a bout of risk aversion across the markets. We continue to see AUD cross selling by corporates as the AUD trades near record highs against the EUR and the GBP. Support at 1.0300 and resistance at 1.0400 should hold in trade today.