<b><span style="text-decoration: underline;">1. INTRODUCTION:</span></b>

I spent most of this past week in cash. I took a very cautious approach ahead of the RBA interest rate announcement and press release, the ADP employment data and the ECB press conference by closing all trades.

I have entered a couple of very small trades, establishing my position on the basis that if I am correct I will get a strong continuing move in my trade direction. There are several factors that could spin these trades the wrong way from my perspective, so I am trading with very small lot sizes just 40% of the maximum I would trade with in accordance with my trading plan. The details of these trades are noted later in this blog.

The dysfunctional and quite pathetic U.S. political party squabble continues. The U.S. government is still in shutdown and the brinkmanship of those involved really makes the so-called leader of the “free-world’ a laughing stock. Reading around, a common thread is along the lines of “The USA interferes in other countries politics and tells them loudly how good the U.S. systems are, and that their systems should reflect how good the U.S. systems are”. Well I think that ship has sailed and quite frankly, the U.S. politicians are a bloody disgrace in my opinion.

Personally, I am finding it hard to trade at the moment. The uncertainty of how or when the U.S. politicians are going settle the various disputes surrounding the close down of the government, and the government debt ceiling, plus the longer it goes on before the dispute is sorted out makes it harder to place trades. Do not forget it’s hard enough trading as it is. This uncertainty just adds to the daily pressure. I think that in the very short-term, the USD will strengthen, pending congress sorting out all the issues. However, after a compromise agreement is made, I am still not sure after an initial spike weaker, whether we see renewed USD strength. I still haven’t mentioned tapering yet, and how Ben Bernanke and the FED will react.

The upshot is, I am trading so nimbly right now pending a resolution…. I am thinking of changing my middle names going to “Super cautious” and my twitter handle to @supercautioustrader.

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<b><span style="text-decoration: underline;">2. THE VIEW FROM MY TRADING DESK:</span></b>
<p align="center"><b><span style="text-decoration: underline;">ARE THE MARKETS COMPLACENT… NOT JUST ON THE U.S. SHUTDOWN BUT ALSO ON EUROPEAN ISSUES?</span></b></p>
I am a little perplexed with the market’s reaction to recent events, in particular to U.S. government shutdown. In making that statement I am fully aware that crazy as it sounds this is not the first time that the U.S. government has been forced to close it’s doors and basically stop all non-essential payments amongst other things. I believe it’s at least the 17<sup>th</sup> occasion that the government has been shutdown. Recent times were in the Carter and Reagan administrations to name but two.

The issue I have is that the U.S. economy is so fragile. The economic recovery could at best be described as hit and miss. Good old Ben, at the last FOMC hit the nail once again dead centre, when he said that there was too much uncertainty in matters with Washington that lay ahead. Talk about a brilliantly understated assessment. What he really meant to say, if I could use his approach a little differently was: -

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<i>“Look lads, you know as well as I do those f**king numpties up on the hill are acting like schoolgirls. I have seen better-organized chickens running around farm-yards with their heads cut off. Whilst I have breath in my body, there is no way on this planet I am going to let those f**king idiots undue in 5 minutes what I have been working on for the past 5 years. End of story, that’s it in a nutshell…now…any questions”</i>

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Obviously, he couldn’t say it that way, but, in my own mind, I am pretty certain that he may have wanted to.

The FED’s key measurements of inflation and unemployment were starting to bear fruit according to the economic data releases that were provided. Frankly, I think that the true unemployment rate and numbers are hugely under played and if the accurate numbers of unemployed looking for jobs plus the people who no longer register who have given up were added together, the U.S. economy would fall back into recession at a stroke.

The housing market is patchy at best, and, as I have consistently said over and over sooooooo many times, every economy needs a good, solid vibrant housing market to see economic growth, combined with good consumer spending and falling unemployment to name but three areas. The U.S. does NOT have this.

Therefore, quite unbelievably, Republicans and Democrats hold the country to ransom divided on party political lines. There is no fear of “Tea Party” members ever losing their seats, as they are in GOP strongholds, so they will dig their heels in to the bitter end. The losers are the ordinary people that they allegedly represent, and, they may through negligence send the U.S. economy backwards. Bernanke must have this fear on his radar 24/7

Add to this the European numpties.

Thankfully, the self-proclaimed “Sex God” from Italy backed down. We may have seen the last of Berlusconi as a powerhouse in Italian politics, but think on…write that guy off at your peril. He has more lives that a tomcat. Whilst we have had a vote of confidence succeed in the Italian parliament, note that, the Italians hate the direct interference in the running of their country (who wouldn’t), by the Germans. There is a backlash looming.

Spain has gone a little quiet of late, but economically it is still on its knees. Tourism is down, prices in the Costa’s (Beach vacation resorts) are up. Housing defaults are still in record positions and mortgage arrears high. I still believe that the true position has yet to be aired. This may be the reason that Rahoy (Spanish Prime Minister) has not yet looked for a bailout.

Portugal, Greece and Cyprus are still at the precipice.

Mario Draghi, president of the ECB (European Central Bank) knows this and has another LTRO, Long Term Financing Operation, better known as QE (Quantitative Easing) ready to launch into the Eurozone. All is not well.

How do the equities markets react? Well they are not selling off as I thought they might have done. There may have been the odd flutter based mainly upon the odd sound-byte but no pullbacks of 10% or more. No correction to a 20% pullback is even discussed.

What would happen if the U.S. politicians take their squabbles all the way to the wire and the U.S. is in a position where there is a real risk of a default?

The reaction around the world if taken this far could send shock waves throughout all areas of the globe. This in itself could be enough to trigger a Eurozone LTRO. That would send the Eurozone into a deeper recession than the one the area is trying to escape right now.

Can you imagine if the USD sold off, what effect that would have on Japan and Switzerland? Japan in particular, with Abe and Kuroda spending zillions of Yen on QE to jolt the Japanese economy. The USD/JPY could be back at 80.00 in a blink of an eye. Gold would rally like crazy. The USD/CHF would drop like a lead balloon towards 0.7500/0.8000.

The world markets are so interlinked today, that the old comment of: -

<i>“If the U.S. sneezes…. Europe catches a cold”</i>

Well, it isn’t just Europe anymore, it’s everywhere catches a cold.

It’s all about seeing the bigger picture. Having watched some of the U.S. politicians in action recently, they are not the brightest buttons in the shop. They lack the big picture for the public office position they hold. If they couldn’t give a rats a** about the American people they represent, there is bugger all chance that they give a rats a** about the effect their actions could have on the world economic situation

We have a game of dominoes and the players have no idea of what is called “The Domino Effect”.

For this reason, and there is no better reason, I suggest that from a trading perspective, trade away from the USD, or, take a little holiday from trading and wait until the dust settles. Preserving your capital is what trading is all about. Trading is hard enough right now without adding in another level of risk.

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<b><span style="text-decoration: underline;">3. MY CURRENT LIVE TRADES:</span></b>

I am in three live trades at this present time. Should there be a miracle of progress in the U.S. shutdown story over the weekend, I am viewing it as USD positive and therefore on this basis I am happy to hold the trades over. In addition, if there is no settlement on the situation, I think that the markets will start to jitter and this again is a USD positive position in my opinion.
<p align="center"><b>EUR/USD
</b><b>Trade Direction: Short:</b><b>Entry
/Cost Average: 1.3581
</b><b>Stop Loss: 1.3660
</b><b>Limit/Profit Target: 1.3450
</b><b>Position Size: 40%
</b><b>Closing Price: 1.3556
</b><b>Present Position:  +25 pips</b><b> </b></p>
<p align="center"><b>NZD/USD
</b><b>Trade Direction: Short
</b><b>Entry/Cost Average: 0.8327
</b><b>Limit/Profit Target: 0.8200
</b><b>Position Size: 40%
</b><b>Closing Price: 0.8314
</b><b>Present Position:  +13 pips</b><b><span style="text-decoration: underline;"> </span></b></p>
<p align="center"><b>AUD/USD
</b><b>Trade Direction: Short
</b><b>Entry/Cost Average: 0.9421
</b><b>Stop Loss: 0.9540
</b><b>Limit/Profit Target: 0.8890
</b><b>Position Size: 40%
</b><b>Closing Price: 0.9435
</b><b>Present Position:  -14 pips</b></p>
<b><span style="text-decoration: underline;">4. POTENTIAL TRADES ON MY RADAR:</span></b><b> </b>
<p align="center"><b>USD/CAD
</b><b>Long from: 1.0260
</b><b>Stop Loss: 1.0180
</b><b>Initial Target: 1.0680</b><b> </b></p>
<p align="center"><b>USD/CHF
</b><b>Long from: 0.8990
</b><b>Stop Loss: 0.8950
</b><b>Initial Target: 0.9430</b></p>
<p align="center"><b><span style="text-decoration: underline;"> </span></b></p>
<b><span style="text-decoration: underline;">5. LOOKING FORWARD…THE KEY SUPPORT &amp; RESISTANCE LEVELS WITH THE USD MAJORS:</span></b>

<b>EUR/USD: Closing Price 1.3556. </b>Even with the ECB press conference not mentioning LTRO or rate cuts the EUR/USD only briefly hung about over 1.3600.  We closed the week below the previous strong resistance at 1.3570 and this, in my opinion, should set us up for a continued move lower with this pair. I am short, so I want this to happen. There is a lot of uncertainty around at the moment and if U.S. politician brinkmanship continues the twitchier it all becomes, and, I feel this will produce a roll over in equities and a stronger USD.

<b>GBP/USD: Closing Price 1.6006.  </b>We saw failure at about the1.6250 level. We never hit my goal short entry level at 1.6300, which as you can guess is a right pain in the a** for me given that we closed the week at 1.6006.  Key support lies just below at 1.5960. A break lower through this level and we could see an accelerated move lower. We were over-bought hence the correction move lower; we are in danger of becoming over-sold. If we get a bounce in Asia on Sunday night, we could see a move back to 1.6200, which I guess will be sold into. I am thinking that the cable is heading lower with risk.

<b>AUD/USD: Closing Price 0.9435</b>. I took a short on Friday primarily due to the fact that the EUR/USD and GBP/USD were under pressure and stocks started to falter. Equities ended up higher but it is jittery. My entry level was 0.9500 to 0.9533, so I took this trade earlier than anticipated to establish my short position.  I think we are heading lower once again with this pair, but 0.9270 needs to be taken out to have my thoughts confirmed. Upside resistance is good at 0.9470.

<b>NZD/USD: Closing Price 0.8314</b>.  This pair is very stubborn at the moment. I have tried shorting it a number of times over recent weeks with a mixed bag of results. We are in a trading range of 0.8200 to 0.8340 and if the truth be known this range is a couple of weeks old. I am short, but I would feel a great deal happier with an 0.82 handle than 0.83 at the moment.

<b>USD/CAD: Closing Price 1.0292. </b>This pair is on my radar for a long at 1.0260. I have been patiently waiting for this number. We may only drop to the 1.0275 level in which case, that will have to do. I really feel, that there is going to soon be the mother of all squeezes with this pair front and centre.  If I can get long and we break above 1.0360, that could initiate the squeeze<b>.</b>

<b>USD/CHF: Closing Price 0.9069. </b>I have taken a bit of an interest in this pair since it dropped below 0.9000. I am looking to get long on a pullback to that level once again. 0.8990 is key support and resistance does not really show itself unless we break above 0.9130.

<b>USD/JPY: Closing Price 97.46. </b>We are so close to Armageddon with this pair. Below 96.70 and we are off to 95.00 in my opinion, BOJ or no BOJ intervention, maybe even lower. Then we will have the trade of the century riding this pair back above 100.00 in my opinion. For now the range that interests me is 96.90 to 98.50.

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<b><span style="text-decoration: underline;">6. MAJOR FOREX NEWS THIS WEEK THAT INTERESTS ME:</span></b>

SUNDAY: N/A

MONDAY: CAD – Building Permits and IVEY PMi
MONDAY: CNY – CPi and GDP

TUESDAY: AUD – Employment Change and Unemployment Rates.

WEDNESDAY: CNY – Trade balance
WEDNESDAY: USD – FOMC Meeting Minutes

THURSDAY: GBP – Asset Purchase Facility and UK BOE Bank Rate.

FRIDAY: CAD – Employment Change and Unemployment Rate.
FRIDAY: USD – Core Retail Sales, PPi and Retail Sales

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<b><span style="text-decoration: underline;">7. FINAL THOUGHTS:</span></b>

I hope that I have not depressed you too much, or scared you off trading at the moment. It is just that risk assessment is crucial in Forex Trading and at the moment risks are high. Therefore unless you have to trade, sometimes it is better to remain in cash on the sidelines.

As always, trade within the parameters of your trading plan and take care. Know your risk before you enter a trade. Do not extend your losses if the trade goes against you. You have to be there to fight the next day, the next week and the next month. Let the trades come to you.

Watch out for the Midweek Fx Drive-Thru #3 this week.

Good luck and take care.

Scott Pickering
The Pip Accumulator
Saturday October 5th 2013

FOLLOW ME AT:
Twitter: @pipaccumulator

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