U.K. pound plunges more than 6% in mysterious flash crash

Posted at 8:06 AM, Oct 07, 2016

The British pound suffered a jarring flash crash on Friday, nosediving more than 6% against the dollar in a matter of minutes.

The shock move in early trading in Asia left investors stunned and analysts blaming computerized trading programs for intensifying the dizzying drop.

“It was just another quiet day in Asia, and then, Bang! All the lights went red,” said Matt Simpson, senior market analyst at ThinkMarkets in Singapore.

The pound had already sunk to a fresh 31-year low of around $1.26 on Thursday over deepening concerns that the U.K.’s split from the European Union will hurt the country’s economy. Strategists had widely forecast it would go lower, but not as rapidly as it did on Friday.

The flash crash yanked the British currency down to near $1.18, according to Factset. It recovered most of the losses soon afterward to trade around $1.24.

“You’re seeing six months of forecasts in less than six minutes,” Simpson said. Earlier this week, he had forecast the pound would drop to $1.20 by April.

Experts speculated that that the extreme drop could have been caused by computer trading programs, human error or a big market player making a very large move.

“Trying to find a trigger can become like looking for the snowflake which caused the avalanche,” said Simpson. “All we know for certain is that there will be a lot of investors nursing some very large losses from all of this.”

Jeffrey Halley, senior market analyst at online broker Oanda, said he believed the crash was sparked by reported comments from French President Francois Hollande calling for tough Brexit negotiations with the U.K.

The remarks were enough to push the pound below the key level of $1.26, leading to “an aggressive sell off in a very thin ‘twilight’ market,” Halley said, referring to the time of day when U.S. traders are winding down and their Asian counterparts are just getting started.

The initial fall set off waves of computer-driven selling that deepened the plunge, he said.

Some market watchers said the trading was so chaotic that different data providers gave different numbers for the pound’s lowest point. One put it as low as $1.13, according to Halley.

The pound has taken a beating this week after British Prime Minister Theresa May said Sunday that the U.K. would begin the formal process of leaving the EU by the end of March. The exit will happen two years later, and the U.K. will give priority to controlling immigration.

European leaders have made clear that if Britain does not allow free movement of EU citizens across its borders, it will lose some of its rights to access the free trade area.

So investors are fretting again about two key issues: British exporters may find it harder to compete in Europe, and the country’s banks could lose the ability to do business freely across the region.

The U.K. economy has proved more resilient than expected in the wake of the vote to leave the EU, with the sharp fall in the value of the pound and a big injection of money from the Bank of England helping limit the fallout. But some analysts are predicting that the pain is far from over.

The pound is now down more than 16% since Britain voted to leave the EU.

Halley noted that even after the British currency clawed back some of its losses Friday, it was still down roughly 2% from the New York close. That’s a significant move in foreign exchange markets and could suggest further weakness lies ahead.

“It does point to a revisiting of these lows at some stage,” Halley said.