Tuesday 20/12/2011 8PM GMT 9PM CET

We have seen the start of the short covering rally in the Euro today which we have been expecting and it may run a little further to the upside but this rally is a great selling opportunity – as the big picture hasn't changed – Euro zone is still in crisis and the global economy is slowing.

We had a fall in Spain's borrowing rates and a small up tick in German business confidence but Germany is not the problem economy in Euro zone and the Spanish auction was thin trading. Its enough to trigger a rally though, as speculators are very short and we need to see some washed out the market.

In terms of the USA, we also had some good news today but before we look at the news, lets look at some of the currencies and see where this rally could be heading.

Position Summary

We have been waiting for a short covering rally and it's unfolding now and correcting the oversold condition but in our view it looks like a selling opportunity.

AUD USD: We have been bearish since the pop up to 1080 and we had resistance at the 1.000 line which has given way and stops are being hit. The stochastic fast line has surged and is already in overbought territory and we see the Aussie as a sell anywhere between now and 1.020.

Only a close above 1.020 would change our bearish stance and we see the Aussie trading all the way down to 80.00 in the New Year.

GBP USD: We have been bearish since the pop up above 1.61 and resistance at 1.56, has given way and momentum is overbought and we are holding with stop behind 1.58 and expect the rally to falter – If you don't want to sell a rally wait for a close below 1.56

CAD USD: We are bearish of the CAD and have been since the pop up to 1.010 and our latest trade is short on the break of 97.00 and we have come up to test this level – look for the rally to lose momentum any time now and lower prices to unfold.

EUR USD: The Euro rally is on as we bounce from 1.30 but the Euro has resistance at the 1.32 (the gap) and also at 1.33, where we took our last short trade. We have been highly bearish of the Euro since it touched 1.42 and see 1.20 or lower. The Euro is very oversold and needs to flush out some speculators but the trend long term is down – sell the rally on falling momentum.

USD JYP: 77.50 is good support for the dollar and we have bought into this level and want to see a strong break above 78.00 to set up a potential move up to test the spike high. Buy the dips and be patient for the break.

Note: The rally could run a little further but it's really just leveraged speculators getting their stops hit and not fresh buying and we would expect the stop hitting to end and the dollar to regain its upside momentum. If entering fresh positions – don't jump to soon look for signs of a fall in momentum in the majors before going short.

Euro – Look to Sell the Rally

The Euro rallied today on sharp fall in Spanish short-term borrowing costs boosted the euro today in thin trade and a German business report came in positive - Munich-based Ifo think tank said its business climate index, based on a monthly survey of 7,000 companies, rose to 107.2 in December from 106.6 in November when a fall had been expected by the market.

Now this doesn't change the outlook in Euro zone at all – a thin trading day in Spanish bonds and a minor up-tick in German business confidence is not exactly going to change the big picture of a a zone in the midst of a debt crisis which can still spiral out of control and even worse, there is not enough money to bail out Italy which is the country most at risk.

The Euro zone is dead in its current form and while it might not end tomorrow the time is clock is ticking for a disorderly break up or a new zone which is smaller in size.

In the best case scenario the zone into recession, interest rates will be slashed and austerity moves by many countries will choke off growth. In our view, there will be serious social unrest in many nations of the zone and we would expect a few to leave of their own free will.

Comment

The Euro will move lower and probably be at 1.20 early in the New Year and we have resistance at the gap at 1.32 and this looks like a good area to sell into on falling momentum. We remain bearish as we have been since the pop up to 1.42 and just see this as a normal correction to flush out weak speculators.

USA Housing Starts Surge

Builders broke ground in November on more houses than at any time in the past 19 months, led by a surge in the building of multi family units.

Unemployment rates in almost all U.S. states dropped in November, and 45 states had jobless rates lower than the year before, U.S. data showed today and the U.S. unemployment rate fell to a 2-1/2 year low of 8.6 percent in November -- with 43 states and the District of Columbia recording falls from October which is progress, in an area which is a key to the economic recovery.

Comment

The above just makes us more dollar bullish. If you look at Euro zone, all you see is a mess which is not going to be solved and this will underpin the dollar long term. Better data from the USA and its safe haven appeal will therefore under pin the dollar. We don't see anything other than an un happy ending in Euro zone and don't see the global economy expanding in the short term – this keeps us firm dollar bulls.

We remain dollar bullish as we have been for months and this view has made us good profits and we expect more to come.

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