Correlations can be very high over the intermediate term in the currency markets. This works in your favor during the process of normal market making, because you capture the delta in the average variances of the components of the basket. When news hits the market, correlations increase in the short term and you find yourself building inventory on the side opposite of the move in both assets. You can hedge the worst case or the total risk with derivatives, but diversification among these highly correlated assets will probably be an insufficient hedge.
Then again, I do not trade FX spot. As FX spot markets are not regulated exchanges, you have a higher portfolio risk (intrinsic). If you have not already, you might think about the viability of moving to FX futures and options, using the underlying and other cash spots to drive quotes. Then if you need to declare shenanigans, there will be a process you can go through. Just a thought.
-segv
