Monday 12/12/2011 8.30 PM CET

The Euro fell to the lowest level in two months versus the dollar and other risk currencies followed it south as the dollar firmed up. As we said last week the summit did nothing to help investor confidence, as it provided no solution to the immediate crisis and its going to fall a lot further.

Over the weekend, I watched a video of someone at Goldman Sachs saying that Euro zone was getting to grips with its debt problems and turning the corner but I Must admit I Don't share his optimism at all and last week, we looked at how Goldman were bullish on China longer term and were out and out bears...

Everyone has an opinion but the financial community in general, seem to be bullish the global economy i.e. the IMF were also pretty bullish of China and saw another report which said Brazil was a buy! Maybe driving their porches and living in their detached world of big salaries and bonuses, they simply cannot see the reality but my view is – these people are in for a shock and they will soon suffer like the majority of the population as the recession bites them to.

For me, in over 25 years of trading, the slowing of the global economy and the potential for a meltdown in financial markets has never been so clear. Sure the Euro and other risk currencies could rally short term ( lets face it, its very oversold and weak speculators need to be washed out) and we are getting very bearish but any rally will be short sharp and brief and a selling opportunity.

Before we look at the news, let's look at our view of the major currency pairs.

Position Summary

After banking out great profits last week in our long dollar positions, were re opening them this week and below are the levels to watch for entry...

AUD/USD: We have been trading short since 1.080 and we have made some great profits and went flat on the dip to 1.020 and were looking to get back in on a rally to resistance at 1.020 which fails on falling momentum or a break of 1.000 which if it occurs will cement the down trend. Key resistance is now 1.040.

We are sticking with our view that the Aussie dollar will trade down to the 80.00 level in 2012 and see it as a trend with fantastic long term downside potential.

GBP/USD: We have been trading the short side of the Pound since 1.61. After taking profit last week just above 1.56, we sold the break of this level this morning and were looking for more downside. Key resistance on the upside is 1.58 and look to sell any rally on falling momentum back to this level.

CAD/USD: We have been sellers of the CAD since its pop up to 1.010 and its had a nice decline and we banked profits into 98.00 last week and were looking to get back in. Key resistance is 99.00 and we will sell any rally up to 98.00 or above on falling momentum or take a clear break of 97.00 which cements the down trend.

EUR/USD:We were short from the pop up to 1.42 and we have been swing trading all the way down and made some really nice profits and we expect more to come. Last week we banked out on the dip to 1.33 and now have been triggered short on the break of this level, we now see the breakout point as resistance and now the 1.33 level has given way, we expect our long term target of 1.30 to be hit

USD/JYP: For us the dollar is bullish and prices have moved up today and a move above 78.00 will see the up trend accelerate. 77.50 is now good solid support in our view buy dips or a breakout.

Euro Zone – ECB Stance Pressures Markets

European leaders came up a plan last week and as we said – Merkel and Sarkosy were smiling and smug, thinking they had sorted out the problems but anyone can see, the plan will do nothing to halt the Euro debt crisis and the crisis will intensify.

All they did was announce tighter budget discipline would be accompanied by a closer fiscal integration well that's the future so what about the present? They decided to add 200 billion Euros to their bailout fund and said said they would start a 500 billion Euro rescue fund next year. So next year they have 500 billion? Its to small. Italy's debts are 1.5 trillion alone, then we have all the bailout nations and nations that could fall like Spain – the rescue fund is to small and to late.

Ratings agency Standard & Poor's heaped more pressure on the Euro zone, with its chief economist saying time was running out for the currency bloc to get to grips with its debt problems

Jean-Michel Six, chief economist of the agency who last week by putting 15 Euro zone countries on a watch for a potential downgrade, said last week's EU summit agreement was a significant step forward, but not enough – of course he's right.

The only real short term solution is to use the ECB but Germany is opposed to it at present but unless it changes its stance, the market will continue to attack countries like Italy which has been called to big to fail but it could be tipped over the edge unless confidence is restored and soon.

Looking to the future Euro zone is looking at falling growth, rising inflation and years of hardship and people power will probably bring about its demise Italy began a week of strikes by the three biggest labour unions against Prime Minister Mario Monti's 33 billion austerity package and we have seen huge protests in Spain and of course in Greece. The people of Euro zone are getting fed up with the leadership and the way their lives are being ruined, by arrogant leaders and out of touch leaders who cannot agree what to do.

Britain used its veto at the summit last week but the people were not exactly bothered about it affecting relations with Europe. In an opinion poll in a national paper today the fact is if membership was put to referendum, there could well be a majority who would vote to leave and this is true in many European countries.

The whole Euro zone concept is flawed - its not like the United states with tight leadership and fiscal integration, its a lose collection of nations who all have their own agenda and therefore, fail to agree on what's best for the zone as a whole. The Euro's political divisions and fiscal problems were glossed over in the boom years - but are now starting to accelerate and while, the Euro may be patched up in the short term, in its current format it simply cannot survive long term.

Comment

India – Factory Output Down First Fall Since June 2009

We have been saying for a while, that the tiger nations which have driven growth in recent years were due big falls and after the bad news out of China last week which saw a rash of bad economic numbers and the Brazilian economy showing no growth, India is seeing output fall...

Out at factories, utilities and mines fell 5.1 percent from a year earlier after a revised 2 percent gain in September, the Central Statistical Office reported today which is the first decline since June 2009. Reserve Bank Governor Duvvuri Subbarao has raised the repurchase rate by 375 basis points since the start of 2010 which amounts to the biggest and quickest increases since the central bank was established in 1935.

In fact the Indian Yield curve just like the Brazilian one is inverted which as we pointed out a few months ago is a warning of recession to come and at the time we said this the only 3 countries with worse yield curves were the bailout countries in Euro zone – Ireland, Portugal and Greece.

Final Words- Global Economy Sliding into Recession

Euro zone remains in a mess the UK, Japanese and American economies all remain sluggish and the nations of the East and the powerhouse Brazilian economy which have provided most of the economic growth and optimism about global growth are now all hitting the buffers and we see no reason for the global economy getting better, before it gets a lot worse.

With the bearish backdrop to the global economy, we see the dollar as bullish and after taking profits last week, were back long the dollar and expect more profits to come.

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