Relief Rally and Euro Short Squeeze

U.S. Dollar Trading (USD) banks led global stock markets higher as the European debt crisis continued to show signs of easing after solid Auctions in 10yr Spanish and French bonds overnight. US data also underpinned the move higher with the weekly Jobless claims falling 50k to 352k in a widely noticed improvement in the US Job market.  In US stocks, DJIA +45 points closing at 12624, S&P +6 points closing at 1314 and NASDAQ +18 points closing at 2788.  Looking ahead, December Existing Home Sales forecast at 4.65mn vs. 4.42mn previously.

The Euro (EUR) the Euro rallied sharply for a second day heading back towards 1.3000 as fears the debt crisis spreading begin to ease and shorts in the market take profit. Most crosses led by the EUR/JPY had very strong gains and helped sustain the majors rally. The big risk event ahead is the Greece debt deal with a conclusion expected in coming days. Failure to reach an agreement would see the recent gains quickly given back. Looking ahead, December PPI forecast at 0.1% m/m.

The Japanese Yen (JPY) USD/JPY popped back above Y77 as the EUR/JPY tested Y100 in a sharp rally in the US session. AUD/JPY is also back above the key Y80 level and more gains are on the table if stocks continue to push into fresh year highs. There is still interest from Japanese companies to hedge EUR/JPY on rallies with concern the important cross will continue to trend lower this year.

The Sterling (GBP) did well as sentiment improved gaining towards 1.5500 on the major and not losing much ground against the Euro. The GBP/JPY has also been underperforming lately and sharp buying in the cross along with GBP/AUD short covering helped underpin the Cable move higher. A positive Greece deal may see the relief rally continue. Looking ahead, December Retail Sales forecast at 0.6% vs. -0.4% previously m/m.

Australian Dollar (AUD) the AUD/USD underperformed in the risk rally as December Unemployment shocked at -29k vs. +10k forecast. The EUR/AUD leapt at the opportunity to move 200 pips higher off all-time lows. The market has been selling the EUR/AUD for months and the unwind could be brutal in coming days. Looking ahead, Chinese HSBC PMI previously at 48.7.

Oil & Gold (XAU) Gold rallied to $1670 before easing back $1650. Oil tested $102 before also easing of profit taking back to the $100 level.