Thursday 12/01/2012 8.00PM GMT 9.00PM CET

The Euro has been oversold and its rallying today as the bearish news for it peaked and solid Italian and Spanish debt auctions saw a move up which is flushing out speculators on stop but how much further can it the rally go?

Trade Summary

AUD: We are short into 1.040 and booked profit near recent lows expecting a rally – we have one now and its tested 1.040 and come off this level today and a down turn in momentum sets up a test of support. We need to see a little more weakness to load up and then see a move to support which is 1.010 which is in line with the mid Bollinger Band and if this gives way expect it to cement the down trend.

GBP: We cam in short the Pound again on a break of 1.54, after banking a previous profit into this level from a short at 1.56. We have now taken 50% of our trade in and banked it and waiting to re enter and will look to do so tomorrow if 1.54 holds the advance.

CAD: 99.00 key resistance on the upside. We remain short from 99.00 and we have just put our banked profit back in as momentum has turned down. We are now looking for 98.00 to give way which is mid Bollinger band support and then, expect to see accelerated selling

EUR: We have banked 50% of our Euro short trade and see a rally back to 1.28 – 1.29 as a good selling opportunity and its occurring now. We are above 1.28 and the mid Bollinger band is at 1.29 and we think the Euro can push a little higher before turning down so we won't be adding to our position tonight. We will look to sell on weakness tomorrow and key off 1.29 with stops behind 1.30 on falling momentum We have been selling the Euro since the move up to 1.42, made a lot of profit and expect more to come.

JYP: We took the bounce up in the dollar due to it being oversold and were now waiting to go long again on a turn up above 77.00 but we have turned down from this level today.

Euro Zone – Italian and Spanish Debt Auctions Trigger Short Covering Rally

Spain sold twice as much three-year debt as it needed and Italy paid less than it did a month ago on one-year securities at their first auctions of 2012 as cheap money lent to banks by the ECB in December saw the auctions go well. In addition, the ECB left its key interest rate unchanged at a record low 1.0 percent as it pauses to see the impact of recent cuts and other measures such as their injection of liquidity for banks.

The debt auction went well due to the money given to them by the ECB but it won't stop the fiscal crisis long term. In the European economy, we are seeing gloomy data and today, output at factories across the 17-country Euro area fell 0.1 percent in November from October which confirms the view that the Euro economy entered recession in the last quarter 2011.

This was enough to trigger a short covering rally as the bearish news peaked but the debt problems are far from over and Greece, will come back into the spotlight shortly as it re structures debt and Italy and Spain will be in the spotlight again shortly.

Euro zone is slipping into recession and the ECB has already started printing money which means a lower currency by default.

They have held interests rates for now but they will come down further and the ECB will continue to print money but there is no long term happy ending in Euro zone – its finished in its current form and sometime in the near future, the debt crisis will reach situation critical but for now, the Euro will continue its downward path.

There will be short, sharp rallies like were seeing now to correct oversold condition but there a selling opportunity. We expect 1.20 to be hit shortly and longer term, we could even see it trade back all the way to par.

Chinese Inflation Eases

China's annual inflation had eased to a 15-month low of 4.1 percent in December, which is raising hopes of a shift in policy by investors away from containing price increases and towards stimulating growth. As we said yesterday, the Chinese economy is slowing and will slow a lot further, as its export markets dry up and there is no internal demand to kick start growth. Throw in, what is still high inflation and large local government and personal debt and you don't have the background to kick start growth, the aim of the Chinese will be to avoid a hard landing.

The Aussie dollar is the currency most vulnerable to a Chinese slow down and we expect it to break hard in the coming months as China slows and the fiscal crisis in Europe gets worse fuelling demand for safe haven currencies.

Risk Assets – Huge Falls are Coming Safe Haven Currencies Going Up

Risk assets are holding up well so far in 2012 but it won't last and we expect to see big falls in global equity markets this year.

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