 "Pound's flash-crash baffles traders")
Two minutes of chaos in Asian trading sparked the biggest plunge in the pound since the Brexit referendum, with traders saying the slump was exacerbated by computer-initiated sell orders.
The 6.1 per cent drop drove sterling to a 31-year low of $1.1841, according to composite prices compiled by Bloomberg of contributions from dealers. With the currency already in freefall amid concern a so-called hard Brexit is on its way, Friday's slide took it to the weakest level since 1985. At least one electronic-trading platform recorded a transaction at $1.1378, said traders, who asked not to be identified because they're not allowed to speak publicly.
The extent and speed of the drop adds to signs that bouts of extreme volatility are becoming more commonplace in the global currency market as the volume of transactions dwindles and algorithmic traders pick up market share. In January, the South African rand tumbled more than 9 per cent in 15 minutes before rebounding, while New Zealand's dollar had its own flash crash last August.
Others pointed to a Financial Times article citing French President Francois Hollande as saying the UK had opted for "a hard Brexit," and it must suffer the consequences of its June vote to leave the European Union. "It caught the market wrong-footed and triggered a lot of algorithmic selling," said Hugh Killen, Westpac Banking's head of trading for foreign exchange, fixed income and commodities in Sydney. "We didn't see any significant demand for sterling off the low. It was more of the point that the selling subsided and the market calmed and it reverted back to a level that was more realistic for the day." One-week implied volatility for the pound against the dollar jumped to as high as 16.77 per cent, the highest since July 14, from a 10 per cent closing level Thursday, according to data compiled by Bloomberg.
Hollande, speaking in Paris at a dinner attended by EU officials, urged the bloc to fight hard on negotiations with Britain. "There has to be a price to pay or else the negotiations won't go well," Hollande said.
"Such comments on their own would not be enough to cause a plunge on this scale, but once a move gets going in thin liquidity it can snowball quickly," said Gareth Berry, a foreign-exchange and rates strategist in Singapore at Macquarie Bank.
While the pound "may recover to the $1.25 area today, all technical support has now been obliterated, so sterling is doomed from here over the months ahead."
UK benchmark 10-year government bonds slid for a fourth day, pushing the yield to as much as 0.98 per cent, the highest level since June 30. The yield is headed for the biggest weekly increase since August 2015.
The slide in gilts coincides with a jump in investors' inflation outlook. The 10-year break-even rate, a gauge of expectations of inflation derived from the difference in yield between regular and index-linked bonds, climbed to 3.03 per cent Friday, the most since January 2014, based on intraday prices. Other markets remained resilient. S&P 500 Index futures expiring in December slipped 0.2 per cent, while a gauge of Asian equities lost 0.3 per cent. The FTSE 100 benchmark stocks index for the UK was 0.4 per cent higher. Exporters have rallied as the weaker pound buoys the outlook for earnings. "It is possible some opportunistic hedge funds, model-based accounts including algorithmic traders, seized the chance to capitalise on the thin market liquidity and aggressively sold GBP/USD, triggering a series of stops," Richard Grace, chief currency strategist and head of international economics at Commonwealth Bank of Australia in Sydney, wrote in a note to clients.
The pound may weaken beyond CBA's 2017 forecast of $1.20 as the UK economy slows further and capital outflows accelerate, Grace wrote. Speculation of further interest-rate cuts by the Bank of England and policy-tightening by the Federal Reserve in December will also pressure sterling, he wrote.
Derek Mumford, a director at Rochford Capital Pty in Sydney, said he and his colleagues were searching for a reason for the pound's plunge, scanning news-agency reports and the internet.
"The speed of the move looks like a kind of a flash crash, some sort of failure," Mumford said, adding that sterling is set to drop to $1.15 in the coming weeks if it doesn't recover above $1.28. "I'm sort of struggling to justify it. I don't think there's any shock that the EU will be going for a hard Brexit."
Leaving the EU was the main topic at the ruling Conservative Party's annual conference this week, and UK Prime Minister Theresa May highlighted the possibility of a hard Brexit that would restrict access to the EU's single market so that the government can control immigration. Sterling has tumbled since she was said to take the view that financial services would get no special favors in EU exit talks.
The pound has dropped 16 per cent since the June 23 referendum and is 2016's worst performer among 31 major currencies tracked by Bloomberg. Companies including Goldman Sachs Group and AllianceBernstein Holding have issued predictions for more pain ahead.
The volatility on Friday was "in a word, frightening," said Karl Schamotta, director of foreign-exchange research and strategy at Cambridge Global Payments in Toronto. "Confidence in the currency markets has been badly shaken once again, and any trader who rode tonight's roller-coaster will certainly question the quality of liquidity going forward."
Bloomberg
