nday 16/01/2012 8PM GMT

The Euro is oversold and will have short and sharp rallies to flush out weak speculators but long term its doomed; this spells big trouble for another major nation China which looks set for a hard landing. All this will lead to is the safe haven dollar and Yen, going higher in the months ahead.

Before we look at the news in Euro zone lets take a quick look at our trading positions and some levels of support and resistance.

Trading Summary

AUD: The Aussie has key resistance at 1.040 and we expect this to hold and were looking for a break of 1.020 to confirm a near term top and expect huge downside if this occurs to 80.00 in the next few months.

GBP: We have been trading short since 1.62 and our latest short taken was at 1.54 we broke hard and have banked 50% of our profit. We will add it back on any rally to 1.54 on falling momentum and key resistance is now 1.55 in line with the mid Bollinger band.

CAD: Key resistance is 99.00 and key support is at 97.00 – we have been selling since the rally up to 99.00 and remain bearish. Were moving up to test 99.00 right now and we think this is a great level to sell into on falling momentum.

EUR: We have been shorting the Euro since the 1.42 level and selling back to the trend line on rallies and banking 50% of our trade near support and we did this again on Friday as we fell back from 1.29. We see another rally coming to this level 1.30 to flush out weak speculators and remain bearish and looking for a choppy trade to 1.20 or lower.

JPY: We are flat and playing the range between 76.50 – 78.00 with a dollar bullish bias and would look to buy into support on a momentum turn up and its being tested right now.

Euro Zone – The Crisis with No Policy for a Solution

Germany is the only major euro zone member to retain a AAA credit rating, refused today to accept an increase in rescue fund. At the same time we have the problem of Greece who has yet to agree on its debt swap with its creditors which sets up default.

The European Financial Stability Facility had its triple A rating cut by the S&P ratings agency and is now AA. The remaining nations with AAA ratings must increase their guarantees, to get its triple A rating back but that's unlikely... German Chancellor Angela Merkel is in no mood to commit more German money and her spokesman, Steffen Seibert made their position clear to reporters:

"The government has no reason to believe that the volume of guarantees that the EFSF has now should not be sufficient to fulfil its current obligations” and added "We should not forget that it has been decided to significantly move forward the ESM and to have it in place in mid-2012, one year earlier than planned."

It doesn't have enough money to deal with a major default and everyone knows this apart from the Germans it seems and it is really just Germany not wanting to commit funds so much for the united Euro zone policy.

Only just about a month after an injection of bailout funds helped to avert bankruptcy Greece s is again on the verge of a default and a possible exit from euro zone. Athens must to a deal with the private sector within days to avoid going bankrupt, as it has 14.5 billion euros of bond redemptions fall due in late March. Without a private sector bond swap involving a voluntary write down, a 130 billion euros. a second bailout for Greece will not be on the cards and it will go bust.

Greece leaving Euro zone would be positive in our view just as it would have been when it first defaulted. It cannot survive anyway, as fiscal austerity is not enough to create funds needed for future repayments so Euro zone would be best to just let Greece leave.

The International Monetary Fund also that the outlook for the whole zone and Greece is worse than it was when the last bailout package was agreed in October, raising funds needed by Greece into the 2020 period

So where does this leave Euro zone?

Well the rescue fund is to small but they are pushing for closer union down the line and are preaching austerity but who believes this can instil confidence now? No one, its to little to late and many of the targets are way to optimistic. So we have austerity, as economic growth shrinks which will condemn Euro zone to the worst recession since the 30s and the possibility of a major going bust to cement a global recession.

Trading Strategy

We will take any rally and sell into it and bank on a move to oversold this has served us well since the Euo peaked at 1.42 and we see no reason to change this strategy – our downside target was 1.20 but the way things are going in Euro zone we could easily hit par.

Euro Zone – The Knock on Effect on China

China is the biggest market for Chinese goods and its contracting and China is in big trouble. All its export markets are drying up and there is no domestic consumption to pick up the slack. Add in high debt levels, a housing bubble and inflation and you have the potential of a huge down turn.

As we said at the weekend, no one really has factored this in and think China can continue to grow but watch the data from now on and it will be bearish. When traders actually see the reality of the facts, it will cause a break in the commodity currencies

(particularly the Aussie Dollar) which has held up well over the last few weeks. Key off 1.040 in the Aussie and watch for a close below 1.020, to cement a top and wait for the Aussie to sell off hard.

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