The Euro rally is just at 1.30 but this is really short covering as we have a record net short speculative position as we noted in our reports at the weekend but the rally looks set to stall here and the dollar will regain its upside momentum.

The risk rally has run most of the currencies we track to overbought levels we have started moving short some of the risk currencies and loading up on dollar longs – we have traded short on the Euro Aussie dollar and have taken profit on our long Dollar Yen – lets round up our positions and then take a look at the news.

Position Summary

AD: We have come up to get just above 1.050 and we have gone short again short on falling momentum and look for a test of the 1.030 mid Bollinger band support. Our momentum indicators are at a bullish extreme and there is little upside left, without a pull back.

BP: The British Pound has tested 1.56 and we think this level will hold look to sell weakness and look for a move to test 1.55 and if this gives way, the bears will be back in control.

CD: Were at 99.00 now and this is the level to sell into with stop behind par – were overbought and expect a downside break to target 97.00 tomorrow.

EC: Were up above 1.30 again but momentum is overbought. We are lightly trading the short side and have relatively wide stop back behind the gap at 1.32 and will sell more if we rally to this level or take a break below the 1.29 support level.

JY: After banking a small swing trade profit last wee, we are long a dollar long swing trade on move above 77.00 and we have gone up through our target now at 77.50 so were banked and will wait to buy the dollar again on a pullback. Were overbought but see the dollar a good buy on the dips.

Euro Zone - Greece A Deal But More Problems Ahead

Greece's private creditors had their bond swap deal rejected by Euro zone ministers on Monday which was a demand for a 4 percent coupon, or interest rate, on new, longer-dated bonds in exchange for existing debt and a solution needs to be found hopefully everyone will be sensible otherwise we will have a messy default.

Greece is doomed long term anyway and maybe it would be good for them and the zone if they left after all, its 2% of GDP and that's not much the bigger problems are countries such as Spain or Italy. The amount of money set aside by the ECB in case of a default is not enough and their long term tighter fiscal union and austerity is not going to help in the short term.

The recession is going to deepen in Euro zone and this is at a time of austerity which will choke growth even more and we are going to see things get a lot worse before they get better. Recently the ECB injected liquidity into the banking sector but this won't help the economy either.

European banks are preparing for a potential worsening fiscal crisis, with many stockpiling cash and reducing new loans to new clients as they seek to protect themselves against a liquidity squeeze and this after the European Central Bank injected 489 billion euros of cash into the banking system in December. Cash deposits at the ECB have since gone back to the ECB and a record 528 billion euros are there this week which is a far higher amount than after the Lehman Brothers collapse.

Faced with 650 billion euros of debt coming due this year - almost 40 percent of which matures before the end of March - lenders are choosing to play safe and while this is good for the banks its not great for the economy.

One major point to keep in mind is the ECB is expanding the money supply and just as QE in the US, saw the currency fall, the same will happen in Europe. The recent rally is short covering and the long term fundamentals look grim and should see the Euro easily hit 1.20 or go even lower if the fiscal crisis really heats up.

IMF – Bullish on Global Growth

The IMF lowered its estimate for global growth this year to 3.3 percent from a September forecast of 4 percent. The expansion next year will be 3.9 percent, down from 4.5 percent. The euro area may enter a “mild recession” in 2012 as it shrinks 0.5 percent. The U.S. outlook was unchanged at 1.8 percent growth. The forecasts hinge on increased efforts in the 17-country euro area to fight the financial turmoil, the IMF report said.

It called on European policy makers to increase the size of the region’s rescue fund which of course has fallen on deaf ears and the chances of a happy ending in euro zone are not that great our view and we like the zone may enter a “mild recession” we would say the zone is already in recession and it will be the worse one in decades and will last for years.

China’s estimated expansion was cut to 8.2 percent from 9 percent India is expected to grow 7 percent in 2012, 0.5 percentage point less than in September forecasts.

They look pretty optimistic again and we have said numerous times, China could have a hard landing and in India the same is true; with high inflation and very little opportunity to cut rates the outlook looks grim. Furthermore, we have an inverted yield curve which normally warns of a crash

FED On Hold

The Federal Reserve is expected to signal that interest rates will be held near zero into 2014. There will be no action from this policy meeting and at present there is no need - The U.S. economy strengthened toward the end of last year, and the unemployment rate has dropped to near three-year low of 8.5 percent in December. They will wait to see if the Euro crisis gets worse and see what impact it has on the US – For now, it looks like its going to be no change.

Dollar Dip is a Buying Opportunity

 The stock brokers and banks have got their sunglasses on and see no real problems in the globla economy which can't be overcome but they can enjoy the stock rally while they can because we have huge problems ahead and this makes the dollar a buy on the dips, as global growth falls and the Euro zone fiscal crisis continues.

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