Wednesday 21/12/2011 8PM GMT 9PM CET

The Euro mounted a rally as expected yesterday and pulled the other risk currencies up - but this in our view, was just short covering and as we come to the close of the day, the rally is losing momentum and we think the dollar should resume its up trend.

The big picture remains the same – the Euro fiscal crisis is very much alive and the global economy is slowing up and will continue to slow and of course, the fiscal crisis in Europe could trigger a worldwide recession and the risk of this happening, are increasing. Before we look at the news lets look at our positions.

Position Summary

We have been waiting for a short covering rally and it's unfolding now and corrected the oversold condition and as we said yesterday, we saw the rally as 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. We saw a push up to test 1.020 and were on our way back down again now and momentum is falling. 1.020 looks like solid resistance now and we expect it to hold and lower prices to unfold. 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 we have stops behind 1.58 this level has held and prices are settling near the lows and we now see a move back to and 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. The gap was tested today and held momentum has turned down and were looking for a move below 1.30, to set up the next leg of the down trend. We have been bearish since the pop up to 1.42 and have now extended our target on the downside to 1.20.

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 – were just above this level now and looking for follow through AM.

Note: The recent rally we believe was just leveraged speculators getting their stops hit and not fresh buying and we would expect the stop hitting to end and the dollar to resume its upward path. This time of year you will see exaggerated price spikes so trade lightly but keep your eye on the big picture which is – the dollar up trend.

Euro – Rally Fades as ECB Embarks on Damage Limitation

There is still no cure to the fiscal crisis in Euro zone but the ECB made a move to provide liquidity for banks and the size of the problems in Euro zone can be seen by how much cash they decided to take which was well above most estimates.

Banks borrowed a record 489 billion Euros at the ECB's first ever lending operation, designed to give banks funding who are struggling to get it through normal channels due to the worries about exposure to debt and over a quarter of the lending was to Italian banks according to Reuters with the total being a whopping 116 billion euros ($143.52 billion).

With the ECB realizing more cash into the system, increasing money supply will see overnight rates fall but how much will this really help when interest rates are so low anyway?

The question people need to ask is - will financial institutions choose to hold onto the cash so they pay their own debts, or start lending again?

Banks have a dilemma they can either choose to continue buying debt but need to balance this with the need to reduce risk exposure to government debt. Our guess would be banks will look after number 1 (them) and use the cash to reduce risk exposure.

Euro zone has no policy to solve the crisis short term and restore confidence and the market will continue to drive borrowing costs up because they have no confidence in Euro zone's policies.

The Italian economy is a good example of the problems in the short term. The economy contracted in the third quarter, indicating the country is facing its fifth recession since 2001 and at the same time, the government is putting in place new austerity measures which will reduce growth even further.

Gross domestic product declined 0.2 percent from the second quarter, when it expanded 0.3 percent, national statistics showed today and the contraction will continue. So let's look at this in perspective – borrowing costs can easily spike back up above 7% again and in the next few months, we are going to see economic activity plunge as austerity bites. Declining revenues, spiralling borrowing costs and no confidence from investors, will see Italy become the focus of the market again and what will Euro zone policy makers do?

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.

Home Sales Up – But Realtors Get Figures Wrong for 4 Years!

Homes sales surged in November but revisions to data for the last four years showed the housing recession was much deeper than reported The National Association of Realtors reported that sales of previously owned homes increased 4 percent from October to an annual rate of 4.42 million units which is healthy but check this out:

The Realtors group admitted it had overstated home sales from 2007 to 2010 by a whopping 14.3 percent! So how did this big error occur? It blamed double-counting of properties and geographic population shifts, among other reasons, for the revisions, none of which add up how such a big error could be made. Maybe it served them to make the error and make people think things were better than they really were or maybe I am just being cynical!

Its a step in the right direction though because, during normal times, its calculated that that one in every eight jobs in the economy is generated by house building and housing-related activity. While the U.S. economy appears to be gathering strength, the global backdrop remains troubling with much of the rest of the world slowing down and Europe sliding into an almost certain recession.

Another problem is lawmakers have yet to break an impasse over extending a payroll tax cut for 160 million U.S. workers, which is due to expire at the end of this year. Economists have warned a failure to keep the tax break in place will hit the economy hard.

Japanese Exports Fall

The Japanese economy remains under pressure and exports fell and the central bank lowered its assessment of the economy for a second straight month. Shipments dropped a more-than-expected 4.5 percent in November from the previous year as exports started to dry up from Europe. All the export nations of the East are going to be hit by slowing demand and as we have stated before, those who think China won't be effected will be proved wrong – China is heading for a hard landing which will really cement the global contraction in terms of falling output

Comment

Where is the good news at present? We dont see much in the global economy sure the US economy is making some progress but this can easily be de railed by the Euro crisis which is casting a huge shadow over the markets and we will see it blow up into a huge crisis soon so:

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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