Friday 23/12/2011 8PM GMT 9PM CET

A pretty quiet end to the week as you would expect, as markets slow down for the Christmas holidays but expect some big moves next week and we think we will see the dollar start to re gain its upward momentum.

“A sharp rise in new orders for U.S. manufactured goods in November was offset by weak personal income growth to temper the growth hopes for the giant American economy that had boosted European stocks and supported the euro on Friday.” (Reuters)

The above is from Reuters but its just price action fitted to the news the Euro is steady as no one wants to buy or sell, before what is a long weekend and thin market volumes have just seen some light position squaring; the news out the USA is simply telling us what we all know – the US economy is making progress but its very slow progress and the real focus is the ongoing mess in Euro zone.

The market is very short the Euro and these shorts, need to be taken out to correct the oversold condition and this weeks pop to the upside, 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 again, 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

The ECB's mid-week provision of 490 billion euros of the cheap longer-term cash to over 500 of the region's banks (with Italian banks being the biggest takers) the largest ever amount of liquidity realized into the global financial system.

It helps the banks a bit but no one else because as we have said they will be reluctant to lend to each other and will use to offset debt. yesterday, the use of the European Central Bank's overnight deposit facility reached a new record high. This is helping keep the banking sector working but countries need to be kept working to and the one everyone is looking at is Italy.

Yields on Italian 10-year bonds were steady at 6.92 percent, just below the 7 percent mark seen as un sustainable over the long term. Over in Spain, Spanish equivalent bonds traded 3 basis points lower at 5.39 percent.

Policy makers seem clueless on how to restore confidence and the recent summit on tighter fiscal and budget controls was to little to late. We will see a major event in Euro zone in 2012 with a country defaulting and Italy looks the one most likely now and when this event comes, Euro policy makers will have to act and quickly to avoid catastrophe in the Euro zone and in the global economy.

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 in the New Year it could easily tumble to 1.20 or lower quickly.

Better News Out of the US But...

U.S. durable goods orders jumped 3.8 percent in November after being flat in October, economists had forecast orders rising around 2 percent from a previously reported 0.5 percent fall. U.S. consumer spending rose less than expected in November as income growth put a squeeze on households, personal spending climbed just 0.1 percent for a second month, while wages and salaries fell 0.1 percent from October.

Like we have said in previous reports – the news out of the US is getting better but there is a long way to go and most investors are focused on the problems in Euro zone.

Overall we remain Dollar bullish and any correction is an opportunity to buy. This strategy has served us well for months and we will continue with it as the global economic outlook remains bleak.

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