Sterling yesterday suffered a dizzying “flash crash” against the euro and dollar in a computer-generated sell-off, sending Brexit shockwaves across markets after France warned of perils ahead for Britain.
The pound plunged more than 6 percent against the US dollar in under 10 minutes in Asian trading hours — at the end of a tumultuous week of heavy losses after British Prime Minister Theresa May signalled she would trigger Britain’s departure from the EU by the end of March next year.
A Bank of England spokesman said that it was “looking into” the cause of the flash crash — a vertiginous drop in an asset’s value that can be triggered and exacerbated by automated trading systems.
Photo: AFP
French President Francois Hollande on Thursday said the EU should take a tough line with London during exit talks to prevent the break-up 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,” Holland said. “We must have this firmness.”
“The value of sterling plummeted overnight as algorithmic trading programs apparently triggered a crash,” XTB analyst David Cheetham said.
“Comments from French President Hollande [surfaced] a minute before the selling began, so it seems far more plausible that news-scanning algorithmic trading systems began a move which gathered momentum,” he said.
Cheetham added that a combination of trades placed by algorithms and stop-loss orders can “exacerbate the move, which is commonly seen to retrace by a significant proportion of the decline within a matter of minutes.”
Stop-loss orders are automatic orders to buy or sell an asset once it reaches a certain price level.
The pound fell off a cliff at about 2310 GMT on Thursday to strike a 31-year low at US$1.1841, before rebounding back above US$1.24.
“A lot of investors are still scratching their heads as to how and why it happened, whether it was a fat fingered trader in Tokyo, an algorithm scanning for any negative Brexit news, or just a big seller of the pound,” said analyst Alex Edwards at trading firm UKForex. “Whatever it was, it shows us that the pound is looking very vulnerable right now.”
Approaching midday in London, the pound rowed back to US$1.2368, while the euro stood at 89.99 pence.
Yesterday’s crash was the pound’s second-largest intra-day decline, bettered only by its precipitous 11-percent slump on June 24, when the shock Brexit result emerged.
Yosuke Hosokawa, head of FX sales team at Sumitomo Mitsui Trust Bank, said: “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,” Hosokawa said.
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 0.5 percent in the afternoon, while Sydney closed 0.3 percent lower and Seoul eased 0.6 percent.
The London stock market yesterday advanced as the weak pound boosted exporters.
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