Tuesday 06/12/2011 8PM CET

S&P ratings agency are threatening to hit Euro zone with a downgrade but really we all know its in big trouble anyway so its not really that shocking. The markets are trading quietly today as we await the end of week summit and possible interest rate change in Euro zone later this week...

No change in markets today, all quiet so summary same as yesterday in terms of positions. Let's take a look at them and then the news today which is looking ever more bearish...

Summary

We have reduced exposure in all open positions by 50% and banked some profits. While we are dollar bullish we expect a nervous market in the next few days and will look to put these profits back in on rallies or breaks of support.

AUD/USD: Were short AUD from 10800 and had been swing trading on the way down but our stop was hit on the break above 1.010 and we sold on the move above 1.030 and have taken 50% of our profit in.

We view a a rally to 1.040 as good selling opp on falling momentum with protection behind 1.050. A break of 1.010 is needed to cement the down trend. We are going to turn down here in our view but could have one more blow off to the upside. We see the 80.00 level being tested in the next few months and see this as one of the best potential trends on the board.

GBP/USD: We have been trading the short side of the Pound since 1.61 and its sold off hard. Last week we added to shorts into 1.58 and have taken this profit in and will sell back to 1.57 with protection behind 1.58. A break below 1.56 will cement the down trend.

CAD/USD: We are short from the 99.00 level and see this as a good level to sell back to and a break of 97.00 support, will cement the down trend

EUR/USD:We were short from the pop up to 1.42 and we have been swing trading all the way down and took some profit last week into the lows.1.35 is near term resistance to sell back to with protection behind 1.36 which is key resistance. A break of 1.33, will see accelerated selling.

USD/JYP: We bought the dollar on the break of 77.50 and sold it after it failed to follow through 78.50, its a small profit and we moved to the sidelines and were waiting to buy a dip.

Note: While we view the dollar as bullish, we see some good spikes up coming in the majors particularly in the Euro, due to its heavy speculative short position. We are therefore be cautious and will load up shorts in the majors on rallies to resistance or breaks of support – this looks like being a very choppy and volatile week.

Euro Zone – No Clue How to Solve Crisis and Pressure Mounts

“Standard & Poor's fired a second warning shot at the euro zone in 24 hours, threatening on Tuesday to cut the credit rating of its financial rescue fund as European leaders raced to find a political solution to their sovereign debt crisis.” Reuters

in fact its threatened to downgrade 15 nations in the zone but who really cares, about this, its obvious there in a mess and you don't need a ratings agency to tell you really, as the facts have been plain to see for weeks – the rescue fund is to small anyway even with IMF help but what are Euro zone actually doing.

“German Chancellor Angela Merkel and French President Nicolas Sarkozy want to change EU rules to impose mandatory penalties on euro zone states that exceed deficit targets, aiming to restore market trust and prevent the crisis spiralling out of control.” Reuters

This does not solve the crisis now – great for the future but it alone will not restore market confidence. We need a bigger role for the ECB and a common bond, that will solve the crisis but will we get it?

Only when there is no other option surely Germany must give way or the result will be disaster for the zone and global economy.

Regardless of the outcome, Euro zone is dead in its current form and will end up in a slimmed down tighter format or suffer a disorderly break up. Let's hope its the former but with the amount of debt, the economy slowing and interest rates going down the pressure will be on the Euro for months or maybe even years to come. Sure it can spike as the market is very bearish but this will simply be a selling opportunity

Comment

We remain short from 1.42 and placed our banked profit taken into recent lows back in the market as we came off 1.36 which is key resistance and a break of 1.34 cements the down trend – were looking for the Euro to trade below 1.30 in the next few weeks. We will see some good spikes up as we are oversold but the bearish backdrop, will see the Euro trending lower in the months ahead.

Emerging Market Slow Up – Brazil Joins India and China on the Way Down

Brazil's economy stumbled in the third quarter as the Euro zone debt crisis hit global demand and as we saw yesterday Chinese demand for commodities is falling which will hit countries such as Brazil. The country's indebted consumers held back spending after nearly three years of constant spending.

Latin America's biggest economy posted no growth at all for the previous quarter, a sharp slowdown from annual growth of 7.5 percent in 2010 that was a long way ahead of other developed nations.

As we said a few months back Chinese stellar growth is over and this would hit Brazil and it has. In addition, Brazil has an inverted yield curve which warns of recession – the only countries with worse curves? Portugal, Greece and Ireland.

Traders are ignoring the fact that Chinese, Indian and Brazilian high growth rates are over now. They will continue to slow and add to the general economic gloom in the developed economies such as Euro Zone, the UK and USA...

Final Words.

With the bearish backdrop to the global economy, we see the dollar as a buy on dips. This policy has served us well for months, made us great profits and we expect more to come.

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