Tuesday 03/12/2012 8PM GMT 9PM CET

As the markets get back in full swing today after the holidays risk assets and risk currencies are higher but this rally is one to sell and we view it as mostly short covering.

A look at the CTFC net traders positions shows, Currency speculators increased shorts against the Euro to a record high in the last week of December and built up the largest long dollar position since mid 2010. The Euro is due a short, sharp rally, to take speculators out on stop but its no more than that.

The big problems in Euro zone remain and the rally is a selling opportunity and the trigger for the rally?

News that German unemployment fell more than expected in December with the jobless rate at 6.8 percent, its lowest level since the unification of Germany. Of the problem in Euro zone is not Germany, its the other countries saddled with debt which have already gone under or could go under. This data changes nothing in terms of the fiscal crisis but its enough to ignite a short covering rally with the market being so short Euros. Before we look at the other news, let's take a look at our positions.

Trade Summary

The rally against the dollar is unfolding but its not a change to investors embracing risk its mostly short covering and we want to sell into the rally, we may run a little further but we think in the next couple of days the bears will back in control.

AUD: We have been trading the short side since 1.080 and after a great decline our last position, was stopped out on the move above 1.020. We have now moved onto 1.040 and we are looking for this level to hold a close below Friday's high on falling momentum is however needed to put the bears back in control.

GBP: Following the Euro and we have seen 1.56 give way but the rally should fail into 1.57 – look to sell if this level holds and momentum turns down however a move below 1.56 is needed to put the bears back in control.

CAD:We were stopped out of the Canadian dollar on the move above 98.00 but we see this as a great sell now and will look to sell weakness a close back below 98.00 is needed to put the bears back in control.

EUR: The short covering rally has run up past 1.30 to the mid Bollinger band at 1.31 and will now test the gap at 1.32 which we would expect will hold the decline. There are still shorts to be flushed out so wait until momentum turns down before trading the short side and look for a test and break of 1.30

JYP: The close below 77.00 has us neutral in view on the Dollar Yen for now and we will wait to see where we go over the next few days.

Chinese Data – A Surprise to the Upside Boosts Aussie Dollar

The Aussie Dollar got a lift today and is up testing the 1.040 level and we view it as a long term sell. We may run on a little more to the upside but we think the rally is a great long term selling opportunity but let's first look at the news which has given it a boost today.

China's official Purchasing Managers' Index rose to 50.3 in December from 49 in November - moving above the 50 mark which separates expansion from contraction. Data on Tuesday also showed the official Purchasing Managers' Index for non-manufacturing sectors had rebounded strongly in December to 56.0 from 49.7 in November. Well one figure is just on expansion and the other is a little better but hardly points to Chinese growth accelerating much. Australian manufacturing expanded for the first time in six months.

These figures are boosting the Aussie dollar for now but the big picture overall is one of china slowing down which we have mentioned numerou8s times and the Australian economy is already slowing up – this data is enough today to boost the Aussie but lets see how well it holds up over the next week or so – we expect a big decline.

Risk v Safe Havens

I am seeing a lot of news saying the worst is over in the global economy as manufacturing did quiet well across the globe in December but I still think the worst is yet to come. The US is doing a lot better but Euro zone is in deep trouble and the fiscal crisis will get worse. China will slow as Euro zone slows up and we have already seen other tiger economies slowing and the big picture points to a rocky 2012 – Euro zone fiscal problems could fare up and make what is a global contraction of economic growth the biggest down turn since WW2

No surprise to hear we see this rally in the Euro and risk currencies as a selling opportunity.

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