Monday 05/12/2011 8PM CET

We have heard about a plan from Merkel and Sarkosy to deal with the debt crisis but it doesn't and they had better come up with more on Friday, to avoid disaster long term but we don't see it happening...

We will look at the crisis in Euro zone in a moment and also the slow up in China which adds to our gloomy outlook for the global economy but first lets look at our positions and some levels to look at in the major currencies.

Summary

We have reduced exposure in all open positions by 50% and banked some profits. While we are dollar bullish we expect a nervous market in the next few days and will look to put these profits back in on rallies or breaks of support.

AUD/USD: Were short AUD from 10800 and had been swing trading on the way down but our stop was hit on the break above 1.010 and we sold on the move above 1.030 and have taken 50% of our profit in.

We view a a rally to 1.040 as good selling opp on falling momentum with protection behind 1.050. A break of 1.010 is needed to cement the down trend. We are going to turn down here in our view but could have one more blow off to the upside. We see the 80.00 level being tested in the next few months and see this as one of the best potential trends on the board.

GBP/USD: We have been trading the short side of the Pound since 1.61 and its sold off hard. Last week we added to shorts into 1.58 and have taken this profit in and will sell back to 1.57 with protection behind 1.58. A break below 1.56 will cement the down trend.

CAD/USD: We are short from the 99.00 level and see this as a good level to sell back to and a break of 97.00 support, will cement 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 took some profit last week into the lows.1.35 is near term resistance to sell back to with protection behind 1.36 which is key resistance. A break of 1.33, will see accelerated selling.

USD/JYP: We bought the dollar on the break of 77.50 and sold it after it failed to follow through 78.50, its a small profit and we moved to the sidelines and were waiting to buy a dip.

Note: While we view the dollar as bullish, we see some good spikes up coming in the majors particularly in the Euro, due to its heavy speculative short position. We are therefore be cautious and will load up shorts in the majors on rallies to resistance or breaks of support – this looks like being a very choppy and volatile week.

Euro Zone – Merkel and Sarkozy and a Flawed Plan

Today the Financial Times reported that Standard and Poors 500 credit agency will put France and Germany on “credit watch negative.” Which is not really unexpected, what the market is really concerned with is how are they going to solve the crisis? Let's take a look.

President Nicolas Sarkozy and Chancellor Angela Merkel have agreed a proposal to impose discipline across Euro zone and said, the proposal included automatic penalties for governments which fail to keep their deficits under control, and an early launch of a permanent bailout fund for Euro states in trouble.

The plan will be sent off on Wednesday, in time for the European Union summit on Friday. They have also made clear their determination to drive through an EU treaty change despite objections from some member states. If countries such as Britain, the Netherlands and Ireland blocked a treaty change, the Euro zone would proceed with an agreement among its 17 members open to all who wanted to join, they said and finally, Sarkozy commented:

"In this extremely worrying period and serious crisis, France believes that the alliance and understanding with Germany are of strategic importance," he then added "Risking a disagreement would be risking the Euro zone exploding."

Well the fact is France and Germany have put together a package which is simply not going to work long term and risks “Euro zone exploding”. Budget discipline is all well and good but the market wants solutions to the problems now and the Rescue fund is to small, even with the help of the IMF. the ECB needs to be used and issue Euro bonds but of course, Germany has blocked this option but its the one that's needed to restore confidence.

Euro zone is dead in its current form – we said this a year ago and haven't changed our mind. The only question is will we see a country default and a disorderly break up or a zone that loses members and becomes smaller and more integrated. Which ever occurs the zone is in recession, with debts that will make the lives of hundreds of millions of people suffer due to policy making incompetence for years to come.

The policy's proposed are not enough and most people in the market know it but want to see if there is perhaps a bullish surprise on Friday – but we doubt it. Expect a choppy trade this week but any rallies look like selling opportunities...

Comment

We remain short from 1.42 and placed our banked profit taken into recent lows back in the market as we came off 1.36 which is key resistance and a break of 1.34 cements the down trend – were looking for the Euro to trade below 1.30 in the next few weeks. We will see some good spikes up as we are oversold but the bearish backdrop, will see the Euro trending lower in the months ahead.

China Going Down – As Expected to Add to Global Economic Gloom

With recession in the Euro zone now upon us, the Chinese economy is starting to slow Chinese service sector growth cooled in November to its weakest pace in three months and it will slow a lot further. In fact China will see declines in economic growth which are far bigger than forecast, as its export markets decline, there is no internal demand to take up the slack and the asset bubble bursts.

Add in - local governments heavily in debt and the fact the USA looks set to move on Chinese currency manipulation and we will see an end to the Chinese “economic miracle” and as we have said before- it will be lucky to hold its place as the world's number 2 economy.

This will of hit the Aussie Dollar hard and we see the currency falling by over 20 full points from current levels; as Chinese demand drops and safe haven buying, sees speculators dump the Aussie dollar, after years of speculative buying.

Final Words

With the bearish backdrop to the global economy, we see the dollar as a buy on dips. This policy has served us well for months, made us great profits and we expect more to come.

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