Thursday 22/12/2011 8PM GMT 9PM CET

The Euro had a moved up yesterday which we believe was simply short covering and the market sold off towards the lows at the end of the day and prices today are steady, as volumes thin out into the Christmas weekend. It won't be long though before the Euro starts to fall again...

The market is very short the Euro and these shorts, need to be taken out to correct the oversold condition and yesterdays spike up, will have taken a lot of shorts out the market. While the Euro could have another short covering spike, it remains a sell on rallies and so do the other risk currencies.

There are no changes in our positions today, so lets do a quick round up and then take a look at the news.

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 not to far from this level right now. We expect it to hold but a close above this level, would see us exit the market. We see the Aussie trading all the way down to 80.00 in the New Year and we think its an excellent sell around current levels.

GBP USD: We have been bearish since the pop up above 1.61 and resistance at 1.56, has gave way and we have stops behind 1.58 this level has held and we will simply hold this position with stops in place.

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 are trading up to where our stop is behind 98.00 and we see this level as holding and it's just below this level – look to sell weakness if not short for a low risk entry point.

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, if we break below 1.30.

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 on increased volatility to indicate a dollar bull trend is in motion – we are just above this level now and will wait to see if we can push up 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 – Getting Ready for a Big Move

Wednesday's first three-year tender by the European Central Bank saw a record 489 billion euros ($638 billion) for the low interest rate loans from well over 500 banks, with the country taking the most loans being Italy. This is no long term solution though but triggered some short covering and according to Reuters:

“The scale of the funding operation initially exacerbated concerns about the health of the financial system appeared to be easing pressure on the banks, though concerns remain that it offers no fundamental fix for the region's debt problems.” (Reuters)

This comment is simply fitted to what happened – the market has digested the news and today's action where the Euro has been firm is more down to low volumes and than “easing of pressure”

The problem in Euro zone is spiralling borrowing costs and huge debts and today Italian 10-year bond yields were at 6.8 percent. With debts that total trillions and are 120% of GDP, Italy cannot afford these rates to go any higher but they could easily. The austerity package is to little to late in our view and Italy remains at great risk.

Better News Out of the US But...

Unemployment claims fell by 4,000 to 364,000 in the week ended Dec. 17, the lowest level since April 2008 and the decrease in claims is consistent with payroll gains of around 200,000 a month.

In addition, The Bloomberg Consumer Comfort Index improved to minus 45 in the period ended Dec. 18 from a reading of minus 49.9 the prior week, marking the biggest seven-day gain since January. A decline in lay off's and the cheapest gasoline prices since February are helping to increase retail sales during the busiest shopping period of the year.

Consumer spending is the key to any economic recovery, as it accounts for 70 percent of the whole US economy. Caution is needed though – this is holiday time and people will forget their problems and spend but let's see how bullish they are in the New Year.

We are moving in the right direction but there is a long way to go and the Euro debt crisis hangs over the markets and threatens the global economic system. We like the dollar on the basis safe haven flows will continue until the Euro debt crisis is resolved and it looks like it will get worse before it gets better.

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