Thursday 29/12/2011 8PM GMT 9PM CET

While many traders pack up at this time of year, we don't and the reason is simple. Most currency pairs set there high or low for the following year in this period and momentum is now picking up in the market and the odds favour a strong dollar coming into 2012.

We are long the dollar, have been for months made good profits and expect more to come and our logic is simple: The global economy continues to slow up and we will have a global recession in 2012. Don't believe the banks and brokers telling you it won't come, they have an interest in wanting us all to be bullish but the facts point to a recession and it will be triggered by Euro zone. The Euro zone crisis is simply going to get worse and we will see it continue until, we see a country go bust or Euro zone slims down in size.

Before we look at the news and the mess in Euro zone and other news, lets look at our positions.

Position Summary

The Dollar is moving up and while we will see some short sharp rallies against it, in the coming weeks to correct the oversold condition we don't expect the rallies to last – they will just be weak speculators taken out on stop.

AUD USD: We have been bearish since the pop up to 1.080 and saw 1.020 as good resistance to sell into. Short term we see the Aussie going to test 99.00 and when it breaks this level we expect the big trend to be cemented and have a longer term target of 80.00.

GBP USD: We have been bearish since the pop up above 1.61 and the break below 1.56 has cemented the down trend – sell any rally back to this level or a break of 1.54 – target 1.50.

CAD USD: We are bearish of the CAD and have been since the pop up to 1.010 and this has ben the least volatile currency recently against the dollar and a great shorting opportunity is resenting itself into 98.00 with a stop behind 99.00. Look to sell on falling momentum for new daily chart lows.

EUR USD: We have been bearish the Euro and trading the short side since the pop up to 1.42 and prices have plunged, making this a great trade for trend followers. The Euro has gone through 1.30 and any rally back to this level is a sell on falling momentum. Major resistance is now at 1.32, while the Euro could possibly test this level it won't get through it the Euro is going all the way down to 1.20 or even lower – great bear trend.

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. At present were testing 77.50 – key off this level for longs.

Euro – Going Down to 1.20 Sell Any Rally

Italy sold 2.5 billion Euros of its 10-year bonds, at a yield of 6.98 percent which was not far off a Euro lifetime high of 7.56 percent a month ago. So the crisis of confidence is still there and will continue and the ECB and Euro zone policies are not getting to grips with the problems that Euro faces. Let's look at the liquidity which they have tried to inject into banks which shows there is no confidence that the debt problems will be solved.

“Euro zone banks will continue to park their cash with the ECB in 2012 rather than lend it as recent cash injections offer little hope of thawing frozen interbank markets.” (Reuters)

We said that would happen when the ECB did it, and its obvious why – banks will look after there balance sheets first – would anyone expect them to do anything else? The majority of the money that banks borrowed from the European Central Bank at a three-year tender last week are now back with the ECB in the form of deposits, which hit a record high of 452 billion Euros this week.

Banks won't lend to other banks or add liquidity to the economy as long as the sovereign crisis remains and of course it will remain in fact it will get worse. The whole problem in Euro zone is solvency based and the ECB can add as much liquidity as it wants – its not tackling the root cause but of course, this has been the story in Euro zone, since they let a small problem which was Greece get out of control.

“Many economists argue that quantitative easing - a tool which the ECB has said will not use because it goes against its inflation targeting mandate - would be the most effective way to restore confidence in government debt markets and the Euro zone banking sector” (Reuters)

not it won't, this is a ridiculous argument – how will that restore confidence that a country such as Italy can repay its debts? Quantitative easing is no long term solution, it might fool investors for a short period of time but longer term, Euro zone is finished in its current form.

So we have countries mired in debt, no confidence in policy making and talk of austerity and closer fiscal union in the future is no solution for the crisis we see unfolding now. With no confidence in policy making, debts rising and interest rates on the way down, the Euro will continue to trend lower. This is the good scenario! The scenario we see is worse, with either a country going bust and sending the zone into free fall or a painful slimming down, with several countries leaving for good.

Rallies in the Euro will be short, sharp and brief and simply be selling opportunities.

Comment

At present we see no solution to the problems of debt in Euro zone and see it as a sell on any rally back to the 1.32 level and now we are taking out the 1.30 level a close below it could easily see the Euro tumble to 1.20 or lower quickly.

U.S. equities rose as an index of pending U.S. home sales increased by more than forecast, while other economic reports showed stronger-than-projected growth in US business activity and a fall in jobless claims over the past month to a three-year low which is all positive for the US economy. Things are getting better but there is still a long way to go to full recovery and if Euro zone blows up (which we think it will) the US will be hit.

What we would say though is the US has policies that investors believe in and Euro zone does not. This fact and of course that in times of economic stress the dollar always does well, keeps us firmly bullish the dollar.

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