Steen Jakobsen
The Bank of Japan has abandoned quantitative easing and the European Central Bank may taper its bond-buying programme, so what is the role of central banks in 2017, asks Saxo Bank’s chief economist Steen Jakobsen.
Article / 07 October 2016 at 7:54 GMT

FX Update: Pound flash crash ahead of US payrolls

Head of FX Strategy / Saxo Bank
  • GBP dropped until demand was gone
  • We saw electronic order flows without strong guiding hands to limit volatility
  • BoE's November rate cut no longer in play while the opposite is possible
  • Markets got reminded of the endless liquidity of the US dollar as a safe harbor
Bank of England
The Bank of England might now be more likely to raise than to cut rates. Photo: iStock

By John Hardy

The overnight move in sterling quickly metastasized into an all-out flash crash. Some large order from somewhere set in motion a cascading drop in sterling as resting stop loss orders in the market were triggered in thin market conditions due to the time of day. That drove the exchange rate to the point where there were essentially no bids for a brief time before a sharp recovery set in. Some attribution for the move lower in sterling was given to a speech by French President Hollande taking a hard stance on Brexit negotiations, but this is a thin excuse for what was a clear case of electronic order flows without strong guiding hands in the market to limit the volatility. 

It is tough to say what the immediate fallout will be for sterling from here, as this move does not inspire confidence in the currency and will mean further unease for the legion of foreign investors with assets in the UK denominated in sterling. 

Some kind of official response could be forthcoming today, as it is unacceptable to have this kind of volatility in a major economy’s currency, and UK officialdom would do well to make some kind of strong point sooner rather than later. 

For starters, this has to mean that the BoE’s rate cut for November is no longer in play. And if sterling continues to melt lower in the sessions ahead, eventually it could be forced to hike rates to defend the currency, though we’re far from that path at present levels. 

Meanwhile, the plot continues to thicken for the greenback as it has picked up further strength, with the sterling volatility overnight reminding the market that the endless liquidity of the US dollar as a safe harbor. 

Today’s US jobs report for September could seal the deal for the USD’s attempt to set a larger rally in motion, with EURUSD support already giving way before the release of the jobs numbers later today, perhaps in part driven by dovish talk from the ECB’s Praet late yesterday. The key in the US jobs report is not only in the payrolls change itself, which is only expected at around +170k this time around, but also the average hourly earnings, which saw a disappointing dip in August. A strong pop in the earnings back to the expected 2.6% or higher could cover for a miss on payrolls, provided it isn’t in excess of perhaps -30k.

EURUSD has pushed lower overnight and the action has taken it well below the 200-day moving average and the recent lows, with only a fundamental kick needed from today’s US jobs report to take the action toward the next support objective around 1.1000 and the nominal lows just below.

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The G-10 rundown, express edition

USD – all about payrolls and earnings, with the latter weighing more heavily if we surprise to the upside, even if payrolls are in-line to slightly lackluster.

EUR – The euro yielding to the USD despite the recent ECB taper story. Still, the taper story has set sail, so euro downside versus the greenback could be more sedate than for other currencies in the event of a USD rally.

JPY – absorbing some safe haven flows on the pound flash crash – key focus for USDJPY traders is the support of the upper edge of the Ichimoku cloud in the low 103.00’s and then whether a solid US jobs report can send us into the higher range between 105.00-107.50

GBP – sentiment on sterling must be boosted by a full frontal response from the UK policymakers today. This move has to take BoE rate cuts off the table for the foreseeable future and if the bank really wanted to adjust the new reality for sterling, it would hike rates right back to 0.50% (not likely). BoE Governor Mark Carney’s seat is getting unbearably hot.

CHF – seeing little interest on the sterling volatility. Our idea that further rises in US interest rates are CHF negative has supported USDCHF, but EURCHF still within the range.

AUD – AUD sticking out as the most resilient commodity dollar at the moment – but looking lonely relative to the downside in NZD and CAD. The downside pivot area for AUDUSD looks like 0.7550/00.

CAD – 1.3250+ resistance in USDCAD in play today and the stakes particularly high here with both US and Canada reporting jobs figures today – we like a break higher and a shift of the focus to 1.3800+.

NZD – NZDUSD has broken lower on the breach of 0.7200 and the kiwi looks broadly weak – would expect the currency to underperform in particular if we get both risk appetite lower and interest rates higher, but simply a stronger USD and the waning of the “Reach for yield” them may be enough.

SEK – market steering clear here – CPI up next week and market perhaps steering clear of this currency if risk appetite is particularly poor.

NOK – The NOK move is consolidating and may only find fresh fuel if energy prices surge strongly again. EURNOK resistance at 9.00 under strain this morning and 9.15 is the important resistance for maintaining a downside focus.

Upcoming Economic Calendar Highlights (all times GMT)
  • 0830 – UK Aug. Manufacturing Production 
  • 0830 – UK Aug. Visible Trade Balance 
  • 1230 – Canada Sep. Unemployment Rate/Net Change in Employment 
  • 1230 – US Sep. Nonfarm Payrolls Change 
  • 1230 – US Sep. Unemployment Rate/Average Hourly Earnings/Average Weekly Hours 
  • 1400 – Canada Sep. Ivey PMI 

— Edited by Clemens Bomsdorf

John J Hardy is head of FX strategy at Saxo Bank


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