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FX Sees Flash Crash in Asia – But What Caused It?

FX markets in early Asia experienced what dealers refer to as a “mini flash crash” today as risk aversion levels were ramped up and volatility ensued, with some debate now emerging regarding the cause of this.

USDJPY fell 400 points at one stage before reversing more than half of the drop, while AUDUSD also collapsed sharply to hit a new multi-year low. There were also sharp moves in other pairs, with Cable dropping more than 200 points.

Some analysts said that this was probably triggered by a profit warning from Apple, with research firm, InTouchFX, noting that the first profit warning since 2002 triggered an “algo frenzy”. However, the firm does stress that the warning actually came one hour before the move in FX rates. Sources at banks say that while there were few orders triggered by the sharp moves, establishing the actual high or low on markets is “difficult” as one trader puts it.

Although several analysts are happy to point the finger at the Apple warning, National Australia Bank’s head of FX strategy Ray Attrill also casts doubt on how much of a role the event played. In a note to clients, Attrill says, “Apple’s revised guidance was an initial fundamental catalyst, but can’t justify moves of this scale”, adding the move had, “all the hallmarks of a sudden disappearance of liquidity, which was initially most apparent in USD/JPY (and on a day when the Tokyo market is out on holiday).”

Given the Tokyo holiday, sources are pointing to retail accounts in Japan as a potential source of the extended moves, although this is treated sceptically by one source who points to a “total absence” of retail accounts in the market.

In a research note issued today describing what they called “A classic USDJPY collapse”, analysts at BNP Paribas made no mention of Apple, instead stating that they think that “JPY price movements over the past few weeks may provide an accurate template for 2019 as a whole”.

They later add: “We view that Japanese investor willingness to increase foreign currency exposure (from present record levels) will wane in 2019, leaving the JPY at risk of sharp appreciation similar to what we have observed in the past few weeks. Elevated financial and currency market volatility may also lead to increased hedging of FX exposure which, even if only temporary, could add to pressure for the yen to appreciate.”

The BNP Paribas analysts say that they are forecasting USDJPY at 100 by the end of 2019, well below market consensus.

Given the pre-Asia opening of the timing, AUDUSD was a headline mover, dropping from above .7000 in overnight trade to 0.6730, before rebounding to the 0.6960 level. In the note to clients NAB’s Attrill says that while the moves did have an “initial catalyst” in the Apple guidance, the 6% drop in the firm’s shares was only enough to see AUD/USD extend its overnight losses from the 0.6982 New York session low down to about 0.6975. “The subsequent rapid fall was to around 0.6730” he writes. “The earlier move though 0.70 (for the first time since February 9th 2016) could be reasonably attributed to a combination of a renewed bout of risk aversion (lower US stocks and higher ‘VIX’) and sharply lower base metals prices. Aluminium and copper were both off by more than 2%. But this can’t be viewed as justification for the scale of the subsequent price action in both AUD/USD and AUD/JPY.

“The fact that over half the move down in both these pairs has since been retraced is testimony to today’s moves being first and foremost a ‘liquidity event’,” he adds.

Market makers spoken to about the event report what one terms a “nasty” move and several sources say their firms took a modest P&L hit, although the recovery of at least half the move has diluted the pain. “This is a really nervous market,” says one Asian-based FX dealer. “Liquidity is poor because no one wants to price in any size as they don’t know what’s coming next but that’s not stopping customers from trying to push through tickets that the market simply cannot cope with at this time. I can only see things getting worse until we get some clarity on global economic events.”

According to a note from Morgan Stanley’s research team, that clarity may not be forthcoming because, as it observes, “The deeper US risk assets fall, the bigger the pressure on the US administration to deliver on trade.”

The note adds, “Hopes of US fiscal expansion and deregulation in conjunction with trade restrictions unleashing an investment boom in the US, increasing productivity and hence the growth potential of the US economy, may have to be buried. However, with productivity growth staying muted, US real yields will have to come down too. It appears that the current US real yield level is too high for the US itself. Otherwise, its corporate bond and equity markets would not have sold off.”

Colin Lambert

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