Rumours of a flash crash as FX markets experience high volatility

Sterling plunged by around 6 percent in two minutes in Asia trading this morning before recovering as rumours about a flash crash or fat finger trade spread. And we’ve still got US employment data to come. Happy Friday.

Sterling sank in early Asian trade, at one point losing as much as 7.5 percent against an average of its top counterparts following an article in the Financial Times quoting Francois Hollande.

Referring to the outcome of the Brexit referendum and recent strong-worded rhetoric from UK Prime Minister Theresa May, the French President argued that the EU must be as tough as possible on the UK.

Thin liquidity before the trading open on most Asian bourses probably amplified the move. The magnitude of the drop and the violent recovery thereafter – prices erased more than three quarters of the move within 10 minutes – suggests this is not the whole story however.

There is currently rampant speculation that trading algorithms have compounded volatility. Shellshock after the Pound fiasco appeared to translate into wider risk aversion overnight.

The sentiment-linked Australian, Canadian and New Zealand Dollars tracked Asian stock benchmarks and S&P 500 futures downward, with the Kiwi underperforming amid swelling RBNZ easing speculation. Markets now price the probability of a rate cut at next month’s policy meeting at 66 percent. The anti-risk Japanese Yen and US Dollar outperformed.

Later today, the greenback may continue to build higher as US Employment data is released. The economy is expected to have added 175k jobs in September, up from 151k in the prior month. An increase of more than 143k would keep the three-month average at 190k, a threshold identified by Fed Chair Yellen as supportive of a rate hike in 2016.

This seems to mean that anything short of deep disappointment will reinforce already swelling tightening probability. The priced-in chance of an increase in December is now at 63.6 percent.

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