Flash crash hits pound
October 7, 2016
In currency trading in Asia on Friday, computer-generated selling caused the British pound to dive about 10 percent, sending it from levels around $1.2600 down to $1.1378 within a matter of seconds. Sterling then quickly rebounded to around $1.2500, and after some volatility, it was last fetching $1.2432 - still down by about 1.5 percent.
The sell-off in the beleaguered currency came in the wake of remarks by French President Francois Hollande on Thursday suggesting he wanted to adopt a tough line with Britain during exit talks with the EU.
"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, adding that he believed Britain had voted for a "hard Brexit."
IG Markets' analyst Angus Nicholson said it "looks like it was an algorithm-driven flash crash" driven by the comments from Hollande. "Given low volumes in the Asian session, it would have forced other algorithms to join in and magnify the fall," he told the news agency AFP.
And Sean Callow, senior currency strategist at Westpac told the news agency Reuters that the pound was on "a precipice" since Sunday, Prime Minister Theresa May announced Brexit negotiations would start in March. "I think we've underestimated how many people had money positions for a wishy-washy Brexit, or even none," he said.
May outlined a timetable at the weekend for Britain to leave the European Union by 2019, sending the pound plunging against its major rivals throughout the week. It is now down around 14 percent against the dollar since the EU exit vote, though it is still well off its record low of $1.05 seen in early 1985.
'Not seen the bottom yet'
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.
Analysts believe the uncertainty around the political fallout of Brexit will further weigh on the pound. Yosuke Hosokawa, head of FX sales team at Sumitomo Mitsui Trust Bank, thinks that the currency will plumb new depths, with breaking its 31-year low in sight.
"Negative factors were mounting against the pound, and eventually the dam broke. We have not seen the bottom yet," he told AFP.
uhe/jd (Reuters, AFP, dpa)