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November 7th, 2012 at 5:18 pm

“Fiscal Cliff” Looming Large.

Now that elections are over, with outcome much to dislike of financial markets, there is a new wall of worry on the horizon. At the end of 2012, terms of the Budget Control Act of 2011 are scheduled to go into effect, unless the congress agrees on a new budget. This event is popularly known as the “fiscal cliff” and at least the press is giving it plenty of coverage. Speculations abound whether Obama will be able to convince the lawmakers to accept his proposed budget, or work out some kind of compromise, which would prevent some drastic changes to kick in at the start of 2013.

What is everybody talking about? Once the deadline passes, over 1,000 government programs will be subjected to automatic and deep cuts. That includes Medicare and the defense budget. In addition, taxes related to “Obama care” would start at that time. Last year’s payroll tax cuts would end, as well as certain business exemptions and Bush’s lower tax rates. Nobody really knows what effect that would have on the economy, probably not positive, but combination of higher taxes and lower spending should positive for the deficit. By some estimates, the deficit could be lowered by $550 billion, or almost 4% of the GDP. The closer we get to the deadline, the more dominant the “fiscal cliff” will become, adding a huge dose of uncertainty to all financial markets, including currencies.

Earlier today, I closed a trade discussed here last week, a long in the CAD-CHF. My entry was at 0.9463, targeting roughly the 0.9560 area. The price moved smoothly in the intended direction, but I jumped the gun, closing at 0.9523, or 60 pips gain. Several minutes later, the CAD-CHF reached the objective of 0.9560, which turned out to be the high for the day. Still, a good trade.

The Japanese Yen benefited from the election, getting stronger all day long. That translated to sharp selloffs in the JPY pairs. Now, some of them form tight ranges, suitable for straddle plays. The EUR-JPY in particular shows a narrow price band on the 15-minute chart. While I believe this pair will eventually move lower, for now a non-directional approach might be a better solution, looking for quick 35 pips either way.

Mike K.

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