Flash crash: Asian sell-off slashes 6% off UK pound

07 ตุลาคม 2559

After French President's get tough remarks, computers trading by themselves (without humans) during Asian stock trading session trigger plunge in British pound.

INTERNATIONAL FINANCIAL MARKETS

Flash crash: Asian sell-off slashes 6% off UK pound

AFP News Agency
07/10/2016

The British pound suffered a so-called flash crash in Asia Friday hit a 31-year low of $1.1841 in early trading before rebounding to around $1.2450.

The pound is now down around 14 percent against the dollar since the EU exit vote in the UK (Brexit). The record low of $1.05 was seen in early way back in 1985.

The flash crash originated in computerised trading as a computer - generated sell-off of the beleaguered currency.

The pound has been hammered this week after the British prime minister set out a timetable to leave the European Union (EU).

Tough talk from French President Francois Hollande had underscored the perils ahead for Brexit - bound Britain.

The magnitude of the six percent plunge shows there will likely be further volatility ahead for the pound (which is also known as "sterling").

TOUGH TALK FROM FRENCH PRESIDENT

This week British Prime Minister Theresa May outlined a timetable for Britain to leave the EU by 2019, sending the pound plunging against its major rival currencies throughout the week.

Speaking Thursday, the French President Hollande said the EU should take a tough stance with London during exit talks in order to prevent the breakup of the bloc.

"There must be a threat, there must be a risk, there must be a price, otherwise we will be in negotiations that will not end well and, inevitably, will have economic and human consequences," he said.

"Britain has decided on a Brexit, I believe even a hard Brexit. Well, we must go all the way with Britain's willingness to leave the European Union.

"We must have this firmness," she declared.

ORIGINS OF FLASH CRASH

It " looks like it was an algorithm driven flash crash" driven by the comments from the French President Hollande, said IG Markets' analyst Angus Nicholson.

"Given low volumes in the Asian [stock trading] session [during time of day with little pound trading when US & EU markets are closed], it would have forced other algorithms to join in and magnify the fall".

"We thought today's plunge was a matter of time."

"Negative factors were mounting against the pound, and eventually the dam broke."

"We have not seen the bottom yet."

"Breaking the 31-year low is now in sight." Yosuke Hosokawa at Sumitomo Mitsui Trust Bank warned.

According to experts cited by the BBC: "a computer may have been set to scan the news for negative Brexit stories, with the order to sell if it found any. The situation could have been exacerbated by trading algorithms - software which is designed to trade automatically and can react much faster than human traders... Possibly a keyword or newsflow-focused algorithm started the selling in the pound based on that article, and other algorithms may have seen the volume and momentum coming into the pound at what is normally a relatively low volume time... That may have brought in other algorithms which compounded the selling creating a feedback loop that resulted in a flash crash" (see here).

EFFECT ON ASIAN STOCK MARKETS

"Sterling's crash seems to have affected sentiment across Asia," Margaret Yang, an analyst at CMC Markets in Singapore, told Bloomberg News.

The fright in foreign exchanges was reflected on Asia's stock markets as investors fled high-risk assets, with losses across the board.

Tokyo ended down 0.2 percent and Hong Kong slipped 0.4 percent, while Sydney closed 0.3 percent lower and Seoul eased 0.6 percent.

EFFECT ON EUROPE

While the British pound fell, the euro hit a seven-year-high 94.15 pence, before easing slightly.

Minutes from the European Central Bank indicated it is unlikely to trim its stimulus any time soon.

While the British economy has shown signs of improvement in the months since Brexit, there are concerns about the wider long-term impact on the bloc losing its second-biggest economy.

The next test for sterling will come later in the trading day when the US is due to release a key jobs report, with a healthy reading expected to strengthen the Federal Reserve's case for hiking interest rates before the year's end.