Thursday 15/12/2011 7.00 PM GMT 8.00 PM CET

The markets have been quiet today and the Euro has come off its lows but while its due a good short term rally - its doomed longer term and the Euro and risk currencies will sell off again.

We have been long the dollar for month and see a lot more upside sure the risk currencies are due a good rallies as there oversold but these will just represent another selling opportunity. In recent weeks the news in the global economy has got worse everywhere.

Many remain bullish of China but the country is going to see far lower growth in the months ahead as export markets shrink and the years of spending and debt cause huge problems internally. Finally, we have seen Brazil and India, head south and we noted a few months back the inverted yield curves of these countries would see them slow up dramatically and this is now happening.

The tiger economies have joined the established ones with economic problems which will not be sorted out quickly. We do of course have the fiscal time bomb in Europe as well which threatens the whole global financial system so not much Christmas cheer about.

Let's do quick round up of positions and then look at the news.

Position Summary

After banking out great profits last week in our long dollar positions, were re opened 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 1.20 and have re sold on the breakout below 1.000 and this is now the first level of resistance with the 1.020 level being the next level up. 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. The Aussie can be a bit spiky but this currency is very over valued and going down long term.

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 and were looking for more downside. Look to sell any rally back to 1.56.

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 back in on the break of 97.00 and this level is now resistance.

EUR/USD:We were short from the pop up to 1.42 and we have been trading the short side all the way down and made some really nice profits and we expect more to come and after briefly banking partial profits as we came into test 1.30, we have now sold the break of this level and 1.32 and then 1.33, are levels of resistance. We wouldn't be surprised to see a good rally in the next few days as were so oversold but it will simply be a selling opportunity.

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 Heading for the Inevitable Crisis

The Euro zone is finished in its present form but Merkel and Sarkosy don't see it, they still think the summit last week has put Euro zone back on track but its to little to late and we see no way the Zone is going to survive long term in its present form. Unless the ECB has a bigger role, investors will continue to to attack countries such as Italy but the Euro held today above 1.30 on piece of good news which was an auction in Spain going well.

Benchmark Spanish government bonds eased after a well received bond auction in which twice as much money as expected. However this looks being a short term lull in the attack on the Euro because Italy faces payments of around 100 billion Euros between January and April and at present, Italy as we know from past reports, is the most likely country to tip over the edge.

Even if the fiscal crisis was stabilized in the short term and the zone says together long term ( which we think it won't) there would only be a brief rally as the economic situation is so dire:

Data showed Euro zone inflation at 3 percent for November so there is room to cut rates further in Euro zone will have to do this as the recession in the zone is not just speculation – its reality. The Euro up trend was under pinned by rising rates when the economy was not doing to well now its doing badly and we have falling rates which will see the currency continue to fall. With years of austerity ahead and the economy contracting the outlook is bleak for hundreds of millions of people and that's the good scenario! The worst case scenario is a collapse of Euro zone which will plunge the world into the biggest recession since the 1930s

Comment

The Euro has a huge amount of speculators short and these will need to be shaken out of the market but rallies will be short sharp and brief and we think the 1.33 is the best the bulls can hope for and we now see the Euro if it breaks through 1.30 again selling all the way down to 1.20 or lower. From a trend following point of view, this is the type of trend you dream about and while we have made big profits from shorting into the 1.42 level, we still think there is a lot more profit to come.

Global Economy Sliding into Recession and no Short Term Fix

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 and the Euro zone fiscal crisis is the biggest threat to the global economic system since the 1930s.

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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