Morning Commentary: Flash Crash!

Foreign Exchange - Morning Commentary

Flash Crash!

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Alan Rose
Alan Rose
Foreign Exchange Head Trader
It seems we have been writing about extreme volatility in U.S. and global equities for weeks and months now. A preponderance of negative news has finally flushed out U.S. equity holdings as the market prepares for weaker growth ahead. Equity markets remain on edge and highly emotional as investors try to figure out the future whether related to economic data, Washingtonian politics or Fed policy. Whipsaw price action is the new normal with equity swings of 500 to 1000 points occurring regularly. On December 28, the DJI changed direction 19 times on no news.
The foreign exchange market has been largely exempt from all this extreme volatility with the U.S. dollar and many of the major currencies confined to similar ranges over the past six to eight weeks. Last night, there was a flash crash lower in USD/JPY that occurred in early Australian trading that was breathtaking for it took all of seven minutes. Multiple reasons are being cited for the incredibly sharp move; among them were the disappointing Apple sales guidance an hour earlier, holidays in Japan and thin liquidity, and a flushing out of short Japanese yen (JPY) positions against the U.S. dollar and other currencies.
In a matter of minutes last night, the JPY appreciated by nearly 3.7% against the U.S. dollar, nearly 8% against the Australian dollar and 10% against the Turkish lira. The foreign exchange market eventually stabilized with the JPY correcting its massive gains. But like other asset classes, the fx market is on notice now that they too will not be exempt from the anxiety and angst that has been driving other asset classes. It is a New Year but nothing has changed from Q4 2018; continue to expect highly volatile markets and act accordingly.
  • The ADP Employment report for December (precursor to the Labor department report tomorrow morning) came in much stronger than forecast. Expectations were for a gain of 180,000, but the report showed an outsized gain of 271,000. November was revised lower from 179,000 to 157,000. U.S. jobless claims rose to 231,000 from 216,000, partially affected by the government shutdown. U.S. interest rates are up on the day while U.S. equities are lower.
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