- GBP flash crash: Rumour mill in overdrive as people try to ascertain the cause of the sterling plunge citing a fat finger or algorithmic trading as the two main theories. Brexit uncertainty will continue to be the main driver for the pound
- We believe that the sterling overselling is a kneejerk reaction that is not backed by any fundamentals
- Given the quantity of stop losses and puts that are trailing at around 1.20 and below, we wouldn’t be surprise to see another flash crash
In the early Asian session, the pound sterling plunged 770 pips against the US dollar, or 6.15%, and reached the lowest level since March 1985. The “flash crash” pushed the currency as low as $1.1841 before bouncing back above the 1.24 threshold. The rumour mill is in overdrive concerning the origin of the flash and what triggered a wave of stop-loss orders: some people are calling it a “fat finger”, while others believe it was due to algorithmic trading. The thin liquidity environment did not help in any case. The uncertainty surrounding the Brexit story will remain the main driver for the pound. Over the last few days the market has been increasingly concerned about a potential drop in the GBP as the price of puts has been surging. We are finding it difficult to be bullish on the sterling and play a reversal with no visibility on the outlook. However, we also have the feeling that the pound is being over sold as investors are lost in the dark without any historical benchmark of such a situation. It is likely just a knee-jerk reaction that is not backed by any fundamentals. Given the quantity of stop losses and puts that are trailing at around 1.20 and below, we wouldn’t be surprise to see another flash crash.
EUR/USD continued to slide lower and broke the 1.1123 support (low from August 31st) to the downside and printed a low at 1.1110 in Tokyo before stabilising at around 1.1120. The single currency will continue to suffer from the Brexit spillover due to the tight economic bond between the UK and EU. After breaking both its 50dma and 200dma over the last two days, the currency pair is now heading toward the support implied by the bottom of its uptrend channel at around 1.11. This is last strong support before 1.09 and 1.08.
The Norwegian krone took a hit in the early European session after its industrial output unexpectedly collapsed in August, contracting 4.7%m/m compared to an expansion of 4.7% in the previous month. USD/NOK rose 0.50% since yesterday and hit 8.0953. After rising more than 10% against the greenback against the backdrop of rising oil prices and a delayed interest rate hike in the US, the rally is running out of steam.
Today traders will be watching foreign currency reserves from Switzerland; industrial output from Spain; Halifax house prices, industrial and manufacturing production and trade balance from the UK; inflation report from Brazil; employment report from Canada; unemployment rate, wage growth, change in nonfarm payrolls and participation rate from the US.