We would expect that passage of the US budget deficit plan to cool market volatility; but that hasn't been the case. To a significant extent, the fundamental shifts over the past 48 hours have been largely priced in. The risk in a possible, technical default for the US was high; but the probability that it would actually go through was low. As such, market participants had the luxury to look further ahead and consider what impact this move would have on the economy as well as the medium-term credit rating - neither is very encouraging. As such, we see the dollar hesitant to take up any meaningful run while risk trends remain under pressure unless the Fed decides to pick up the government slack.
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For trading, it isn't very difficult to spot the momentum from the speculative crowd. The recognition of overbought markets and slowing output are overhwhelming votes of confidence from public officials. As such, it is reasonable to hold with risk-aversion setups; but we need to still be very cognizant of the potential volatility with failed - but attempted - intervention efforts. We also need to keep a close eye on upcoming, scheduled event risk - most importantly the ECB, BoE, BoJ rate decisions and NFPs.
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With that event risk in mind, I have two positions that fall within the scope of risk trends as well as this particular event risk: GBPUSD and EURCAD (though, for full disclosure, both have been placed on a demo account as I am testing out trading software). A short GBPUSD is established from 1.6415 (stop 1.6490) as we enter the non-event that is the BoE decision. Disappiontment from no movement here (with a growing risk of further easing) would play into a scenario of a stalled bounce in risk appetite (dollar pullback). The NFPs is another story altogether; but there is a good probability of hitting the first target (1.6330, second is 1.6270); before that is a problem. For a longer-term position, I'd like to take a new (possibly larger) short with a break below 1.6250.
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The other short I have on (also on this demo) is with EURCAD from 1.3785. Near the top of a rising channel and ahead of an ECB decision that will put the region under greater pressure if the central bank ignores the growing financial troubles, I have placed a stop above the channel top at 1.3850 with a first target of 1.37 and second at 1.3625. This one faces considerable risk; so it has to be relatively small. Another two euro-based possiblities to consider depending on the ECB (mainly serving a dovish outcome) is a EURUSD short should it hold and reverse from the 50 percent Fib at 1.4335; and EURGBP should it drop below 0.87.
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Other setups I'm keeping a close eye on include: NZDUSD as it starts to develop another topping patter - still looking for actual reversal momentum. GBPNZD is another high-risk / high-potential reversal candidate should that channel give with a true break above 1.90. AUDJPY is another risk-aversion prime candidate should it hold that 83 former support as new resistance. In the meantime, I'm watching for levels and activity of USDJPY, NZDJPY, AUDNZD and AUDCAD.
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