Wednesday 04/12/2012 7.30PM GMT 8.30PM CET

The Euro is failing on rallies and the trend is down but expect a choppy trade as we have a huge number of speculators short which will mean rallies are short sharp and brief. We still see the dollar as a buy on dips and the reason is simple:

The big long term fundamentals are bearish and the global economy is contracting and will contract further. More worrying is the Euro zone fiscal crisis has the potential to get a lot worse and trigger a huge global recession but don't expect one way traffic to the dollar – your going to get a choppy trade lower with lots of short covering rallies.

Before we look at the news, lets take a look at our positions.

Trade Summary

AUD: We have been trading the short side since 1.080 and after a great decline our last position, was stopped out on the move above 1.020. We have now moved onto 1.040 and were looking to sell on down turn in momentum and if the gap is filled we will have a top in place in our view and see far lower prices ahead.

GBP: Following the Euro and we have seen 1.56 give way where we are short but now were back near entry and see a move below 1.56, setting up a test of 1.54.

CAD:We were stopped out of the Canadian dollar on the move above 98.00 but we see this as a great sell now and will look to sell weakness a close back below 98.00 is needed to put the bears back in control.

EUR: The short covering rally has run up past 1.30 gave way yesterday and prices stalled and turned back down before 1.32. There are still shorts to be flushed out so if not short already focus on hitting rallies on falling momentum – expect rallies to be short sharp and brief we see the Euro going down to 1.20 in a choppy trade.

JYP: The close below 77.00 has us neutral in view on the Dollar Yen but there looks to be little downside left and aggressive swing traders can play the long side on momentum turn ups – the dollar is now deeply oversold and a pop up is likely

Euro Zone – The Fiscal Crisis Continues to Hang Over the Market

The small up tick in the euro zone PMI in December was not really good news and was due to an upturn in Germany, widening the divisions between the region's stronger economies and both Italy and Spain are undergoing a severe contraction. Germany is not the problem – its the fringe debt countries which are and Italy, needs to refinance a lot of money so we will see how much it costs but we don't see borrowing rates dropping soon.

The ECB is trying to save the banking system and kick start growth and has provided huge liquidity in the form of cheap loans to banks in need and dished out 489 billion Euros however Euro zone banks, commercial lenders' overnight deposits at the European Central Bank hit a record high of 453 billion Euros, data showed on Wednesday. The bank-to-bank lending rates continued to drop, as banks hold money back to cover there books rather than lend.

Euro zone is increasing money supply and the above is quantitative easing in all but name and when that happens a currency falls. In terms of interest rates, there also going down - Euro zone inflation eased from last year's peaks of 3.0 percent in December so more cuts will come.

We have no real change in Euro zone in terms of its still stumbling forward with no long term solution in sight but it has one thing in its favor which is the market is heavily short and this can provide some respite but of course these rallies will be short sharp and brief.

Comment

We have been bearish the Euro from 1.42 and our latest trade short is into 1.33 and we see 1.32 as capping any upside rallies – look to sell rallies to 1.30 and above on down turns in momentum. Were looking for a choppy trade down to the 1.20 level.

Risk v Safe Havens The Case for Dollar Strength

I am seeing a lot of news saying the worst is over in the global economy as manufacturing did quiet well across the globe in December but I still think the worst is yet to come.

The US is doing a lot better but Euro zone is in deep trouble and the fiscal crisis will get worse. China will slow as Euro zone slows up and we have already seen other tiger economies slowing and the big picture points to hard2012 for the global economy – Euro zone fiscal problems could flare up and make what is a global contraction of economic growth the biggest down since the great depression – let's hope this scenario is avoided.

No surprise to hear we see this rally in risk currencies and euro as an opportunity to get into dollar longs.

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