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Risk to hurt record long dollar positions?

We are back. Back to half-truths, a little despair and hope. The Euro agenda has not changed, leaders are out to save their beleaguered union, their currency and years of hard grafting. The US will spend the next 10-months deciding who has the honor of leading their once proud economy. China, again, will have to charter its country towards a soft landing; the rest of us are relying on this! If either of the regional policy leaders do not get their objectives-in-tow, then the global house of cards is in danger of tumbling down.

Despite a shortened trading week, European leaders will return to work looking to buy time for the Spanish and Italian governments to take control over their debt and rescue the EUR from fragmentation. The highlight of the remaining four trading sessions will be the employment situation in North America, to be reported on Friday.

The first half of this year is expected to be dominated by European leaders struggling to hold the EU together, threatened by credit downgrades, emerging splits in the union and a looming recession that could compound rising debt. The hurdles and obstacles are daunting, this will allow capital markets and investors to nervously push the EUR on some of the crosses to new record lows.

So far, risky assets have started the year strong, with the USD selling off. A rebound in China’s manufacturing and services PMI’s last month have added to the positive tone.The antipodean currencies have climbed for a fourth consecutive day this morning against the dollar amid signs of increased manufacturing output around the world. Last night, Aussie manufacturing expanded for the first time in six-months (50.2), further proof that the global economy is strengthening after German, Chinese and UK factory output reports beat economist estimates already this week.

This morning, the EUR is again testing close to the mid-1.30’s. Thus far, Eastern European sales have failed to cap the topside and have triggered the running of some stop-losses. Will sustaining these gains prove troublesome above the option expiry levels? The EUR remains high on investors radar and is expected to underperform against the risk sensitive currencies (CAD,AUD,NOK and SEK) over the coming days as fiscal uncertainty in Spain and Italy cloud investment judgment. Obviously, further risk rally will hinge on the US data today. Positive readings from ISM, construction spending and FOMC minutes should kick-start a new risk rally leg for the ‘interest rate’ sensitive currencies. Remember, the market is very long dollars after the “turn”, the squeeze is preferable!

A Happy New Year to all my fellow traders – it’s going to be very interesting year with lots of volatility and lots of trading opportunities. Will be posting details of our fab new Hawkeye trading software which will help to keep us all on a straight and righteous path!