ByThe Telegraph and Reuters
- Pound ‘flash crash’ sees sterling plunge 6pc within minutes
- What caused the sterling ‘flash crash’ overnight?
- Sterling trade-weighted index drops to lowest level since early 2009 after flash crash
- Bank of England ‘looking into’ cause of flash crash
- Sterling’s low for Friday revised after trades cancelled
- FTSE 100 rises benefiting from pound plunge
- Investors eye US jobs data
Pound ‘flash crash’ sees currency on track for worst week since 2009
The pound has recouped some of its losses after a flash crash wiped 6pc off its value against the dollar, but it is still poised to record its worst week since 2009
In Asian trade, the pound nosedived to $1.18, crashing through key-support levels, triggering a sharp sell-off. It hit a fresh 31-year low of $1.1841, surpassing its previous three-decade low of $1.2622, which it touched a day earlier.
The plunge in the pound was attributed to a ‘fat finger’, algorithms, and French President Francois Hollande. Mr Hollande said that European leaders should take a “firm” negotiating stance with the UK.
Sterling has endured a rollercoaster week since Prime Minister Theresa May announced on Sunday during the Conservative Party conference that the formal divorce proceedings from the EU would begin by the end of next March.
On Wednesday, May also commented on the impact of loose monetary policy, which some saw as a thinly veiled attack on the Bank of England. She raised the issue of the side effects of ultra-low interest rates and money-printing.
With fears of hard Brexit intensifying by the day, the pound is now down 5.3pc so far this week – that’s its biggest weekly loss since the week ended January 23 2009.
Markets update: FTSE 100 rises towards record highs as pound plunges
The flash crash in the pound has been the catalyst for the latest bounced in the FTSE 100, sending it back towards record highs. However, European bourses floundered in the red as investors turned their attention to this afternoon’s US jobs report.
Just after midday:
- FTSE 100: +0.71pc
- DAX: -0.71pc
- CAC 40: -0.55pc
- IBEX: -1.09pc
Joshua Mahony, of IG, said: “Recent sterling devaluation has proved a boon for the FTSE, largely justifying the fact that the FTSE 100 remains the only major European market in the green. However, despite the focus upon the fact that we saw such substantial selling in such a short period of time, this opens us up to the fact that sterling has become increasingly delicate this week, with a break to new 31-year lows on Tuesday meaning that the currency now has precious little support holding it up.
“With all the attention paid to the sterling flash crash, it is easy to forget that today was expected to bring volatility for an entirely different reason. The release of US jobs data should help us ascertain the feasibility of a Fed rate hike this year. A weak ADP number, coupled with relatively mixed signals coming from the employment element of US PMI surveys means that markets are hesitant to presume a recovery following last month’s low-ball 151k reading.”
Pound-dollar parity is now a possibility for currency traders
The slump has made the possibility of a historic $1 level real to some investors.
Bloomberg has the details:
A Bloomberg forecasting model, based on implied volatility, showed the pound with about a 7 percent chance of sliding to parity within a year, compared with 3.2 percent yesterday.
“Certainly there are a few calls for parity, yes — there are a few that are positioned for it, that is their target and objective, or they’re hedged for fear it might go in that direction,” said Neil Jones, head of hedge-fund sales at Mizuho Bank Ltd. in London. “I wouldn’t say it’s a mainstream view,” but “the structural downtrend is probably still intact for now.”
The lowest sterling has fallen versus the greenback in the past four decades is about $1.05 in February 1985. Bank of England data show it hasn’t dropped to parity for at a century.
EU must be firm over UK’s Brexit manoeuvring, says Juncker
President of the European Commission Jean-Claude Juncker has said EU members must take a firm stance with the UK over the bloc’s free movement of labour rules during Brexit divorce talks.
“It should be obvious that if the United Kingdom wants to have free access to the (EU’s) internal market all the rules and all the liberties… need to be fully respected.”
“You can’t have one foot in and one foot out,” Juncker said during a speech in Paris. “On this point we need to be intransigent. I see the manoeuvring.”
It comes hot on the heels of comments from French President Francois Hollande, which are thought to have contributed to the pound’s flash crash overnight. Mr Hollande said that European leaders should take a “firm” negotiating stance with the UK.
Why everyone is pointing their fingers at the algos
For those pointing the finger of blame to algorithms, or ‘algos’ for short, for the pound flash crash.
Here’s a great explainer from London Capital Group’s Ipek Ozkardeskaya of how algos operate, and why the flash crash couldn’t be halted.
“Algorithms are designed to act without emotion or thinking based on specific rules written by coders. E.g. “If GBPUSD drops more than 10pips in under a second then sell £1M.”
“The problem is these algos often trigger other algos which trigger more algos… and so on. These algos react seriously fast. Within a few milliseconds or even microseconds. A human doesn’t have time to intervene to stop it.
“By the time you’ve blinked (300 milliseconds) the algo has sold, reloaded and sold again… 20 times! Now you’ve seen it, thought about it and reacted another second has passed. In this time 500 more algos have triggered, each jumping on the bandwagon and selling more.”
Bears back in charge?
Simon French, of Panmure Gordon, flags that the level the pound has to reach for it to bring year-on-year “bear market” in cable.
Meanwhile, Kit Juckes, of Societe Generale says we should expect a “random walk” when it comes to the pound’s movements today.
Sterling 6-month risk reversals show greater bias for weak pound
Six-month sterling/dollar risk reversals, capturing the date by which Britain is expected to formally begin the process of leaving the European Union, showed their greatest bias for the pound’s weakness since early July on Friday.
Risk reversals are a gauge of the balance in the market between options betting on a currency rising or falling. The six-month risk reversal stood at -2.4 vols on Friday, down from -2.05 on Thursday, according to ICAP data. A negative number indicates a bias for a weaker pound.
Sterling/dollar implied volatility, a measure of how steep moves on the exchange are expected to be over a specified period, hit their highest levels since late July across the curve.
Earlier, the pound plunged to a 31-year low in a matter of minutes on Friday, in what traders said was a “flash crash” driven by computer-initiated sell orders that left the currency on track for its worst week since the Brexit vote in June.
and Report from Reuters
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