John J Hardy
Saxo Bank’s head of FX strategy John Hardy takes a closer look at trends and moves in today’s forex charts, including EURUSD, USDJPY, AUDUSD, and EURSEK.
Article / 07 October 2016 at 8:30 GMT

From the Floor: HFT sorcery plucks GBP from the skies, USD ascendant

Your Next Trade
  • Algorithm-driven 'flash crash' sends cable down over 1,000 pips
  • 'We will need to see a response from UK officials' — Hardy
  • EURUSD on the precipice as taper story is extinguished and USD rallies
  • Dialog Semiconductor, Apple suppliers in general may gain on iPhone sales
  • Hedge funds 'loading up on WTI crude oil' — Hansen

From the Floor
By  Michael McKenna

"You cannot have this in a developed country. We are going to need to see an official response."

This, of course, was Saxo Bank head of forex strategy John J Hardy speaking live on today's Global Morning Call about the "flash crash" seen overnight in sterling. "You have to imagine that UK officials will want to instill some sort of confidence in their currency," said Hardy in the wake of a sudden downward jag that saw cable drop from the 1.26 area to 1.1378 in the space of three minutes.

"Saxo Bank's official low is 1.1378," adds Saxo Bank Global Sales director Christoffer Moltke-Leth from Singapore, "but [the charts showed] some trades filled at 1.10 and even below that".

While analysts are still debating the cause of the vertiginous drop – with one popular theory being a sort of cumulative succession of fat fingers and stop-losses in the wake of French president François Hollande's call for tough Brexit negotiations – a consensus is forming around the idea that the initial drop was profoundly compounded by algorithms that triggered stop after stop in trades executed faster than is humanly possible.

Which, when given as explanation to those who do not ordinarily traffic in foreign exchange markets (and who hold their savings and pensions in GBP), may as well be "witches".

What manner of sorcery...
"Strange forces that are difficult to explain were triggered by invisible entities last night. 
Press nine for customer service." Source: Saxo Bank

Beyond the destabilising sorcery of high-frequency trading, and with cable now back around the 1.2440 area, markets are this morning calming their sizzled nerves with forecasts of today's US nonfarm payrolls print, which is set to arrive against a backdrop of dollar strength.

The USD rally started in earnest earlier this week on a very strong ISM non-manufacturing print Wednesday and some hawkish comments from Chicago Federal Reserve president Charles Evans. The combination of data and chatter propelled the USD higher versus the majors as investors were once again seduced into rekindling their much-abused hopes for a Fed rate hike in December or even sooner.

The greenback rally quickly gained ground against the commodity currencies and the yen, and among the majors, the only rival that put up any sort of spirited fight against USD was the euro. The common currency's strength came from a central bank report of its own as the European Central Bank said Tuesday that it was considering tapering its asset-purchase programme next March.

That report, however, has since been denied and now that the US is again the only G3 economy making any real rhetorical steps away from continued easing, EURUSD looks to be poised on a precipice.

"The taper story was holding the euro up, but now it looks like we are on the verge of a breakdown in EURUSD," says John Hardy; "we are solidly below the 200-day moving average and are looking at levels like 1.10 and 1.0950 before a potential break lower to 108 and even 106 in the longer term".

Decline and fall:

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Source: Saxo Bank 

Between fat fingers, policy divergence and (what may as well be) witches, world markets appear ready to depart their current low-volatility zone and return to the big swings and errors of outrageous fortune.

For stock traders, Saxo Bank head of equity strategy Peter Garnry says that such a move may well be profitable for Virtu shareholders as the electronic trading firm and market-maker could post solid gains from the increased bid/ask spreads and generally jagged behaviour of higher-volatility markets.

"Virtu shares have traded massively lower since the firm's IPO," says Garnry, "and we are looking to establish a long position based on projections of increasing volatility".

Elsewhere in equities, Garnry says that he sees a mass revaluation trend afoot among Apple suppliers with Dialog Semiconductor poised for gains on soaring iPhone sales. Concerning the GBP crash and its consequent jitters, Garnry says that he added to the EasyJet position launched yesterday at the London open and remains sanguine about the sterling mean reversion-centred trade.

However dramatic the stop-busting selloff in cable was, its import relative to the broadly strong-dollar/rate hike/NFP-oriented market today is that of a troubling anomaly rather than a trend. In gold, for instance, Saxo Bank head of commodity strategy Ole Hansen reports that the precious metal is back to its pre-Brexit lows versus the rallying greenback and a generally risk-on market.

"Gold is sitting at around $1,255/oz, and silver was the week's big loser," says Hansen, adding that a new report from Goldman Sachs states that the US investment bank sees opportunity in XAUUSD on a pronounced break below $1,250/oz.

"It's significant as Goldman are usually bearish on gold," notes Hansen.

The dollar rally, he adds, has generally seen a pronounced drop in demand across the commodities sector, but crude oil remains the exception as hedge funds load up. "Open interest in WTI has risen to record levels," says Hansen, adding that the calendar-2018 average of WTI futures is back to its June high of $55/barrel.

Finally, Hansen also reports that Brent crude priced in GBP is currently at a 15-month high on the back of a 24% year-to-date gain; Brent priced in dollars over the same period, he adds, is flat.

So there do remain some issues with sterling, with Brexit, with the nerves of traders both human and not, and with a global market that has largely come to be viewed as fragile, distorted, and grotesquely dependent on central bank stimulus.

"Trade carefully," says John Hardy.

There are strange things out there, and bumps in the middle of the night.

Detail of "Witches in the air", Francisco Goya
There are some assets where you are just not quite sure what's holding them up. 
Source: detail from "Witches in the air," Francisco Goya (1798)

Michael McKenna is an editor at Saxo Bank

Editor’s note: From the Floor takes advantage of's unique real-time access to Saxo Bank’s various trading desks around the globe to put our community in touch with the developments that matter to their portfolios.


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