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Aussie Recovers Following “Flash Crash” but Downtrend Intact

The Australian dollar is back trading in the high $0.69s following a wild and rocky Wednesday night. In just a few minutes, a market “flash crash”—blamed on a surprise earnings warning from Apple and thin liquidity—had taken the Aussie down 3.2 percent to a 10-year low of $0.675.

Posted Jan 03, 2019

Markets on Thursday have, in nearly all cases, recovered from flash crashes that gripped currency markets on Wednesday night.

Among possible catalysts for the crash was a surprise earnings warning from the world’s largest company, Apple, which fuelled concerns for the future of global economic growth. With Japan still on its New Year holiday, market moves were likely exacerbated by thin liquidity, traders said.

Taking most of the headlines overnight were the yen cross rates, which plunged between 22:33 GMT and 22:38 GMT.

The yen is the traditional beneficiary during periods of market unrest because of a longstanding expectation that the masses of Japanese funds that have exchanged yen for higher-yielding currencies will scramble back into Japanese markets when volatility or uncertainty increases.

A collapse in USD/JPY into the ¥104s from ¥108.55—a 3.6 percent increase in the yen’s value—took only a few minutes but, to the relief of those holding US dollars, was followed by a swift return into the mid-to-high ¥107s.

The yen was hardly in need of further gains after a stellar run of late and is now 6 percent higher against the greenback since October 3rd.

Among the FX majors, on the opposite side of the risk spectrum was the Australian dollar and, to lesser extents, the New Zealand dollar and British pound, all of which plunged.

The Australian dollar experienced the largest crash, with momentary quotes of only 67.45 US cents and 70.62 yen—the lowest Aussie rates since 2009. At the end of Thursday’s European session, though, the Aussie was just about back where it had been prior to Wednesday’s shenanigans: against the aforementioned lows it was 3.3 percent and 7.1 percent higher at respective exchange rates of 69.7 US cents and 75.67 yen.

What direction markets take now is anyone’s guess. Flash crashes are something that investors are becoming increasingly used to and they typically reverse quickly. With Wednesday’s moves being exaggerated extensions of established trends—the yen has appreciated strongly over the past month, the Australian dollar declined steadily throughout 2018 and the pound remains burdened by Brexit—trend continuation is perhaps more likely over the coming week than larger reversals. Traders could do a lot worse than to stand on the sidelines until they can assess important US jobs data, to be released at 13:30 GMT on Friday.

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