BNY Mellon: Flash Crash

BNY Mellon: Flash Crash

3 januari 2019

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By Neil Mellor, Senior Currency Strategist, BNY Mellon

By Neil Mellor, Senior Currency Strategist, BNY Mellon

A precipitous decline in USD/JPY in the twilight hours between the New York and Asian session has dominated talk in the marketplace today. According to EBS, USD/JPY fell by 4.4% soon after Apple depicted a fairly downbeat outlook for 2019, whilst the JPY jumped by almost 8% against the AUD and by around 10% against the TRY (with stop-tripping exacerbating the moves in both pairs).

The specifics of both catalyst and timing of today’s move aside, it’s hard to argue that a rise in volatility was entirely unexpected. As we noted before Christmas, USD/JPY had seen a far greater number of low readings in realised volatility during the recent equity bull market than during either the post 1987 or post 2002 stock rallies. In fact, since the start of July of last year there has only been one day that has managed a reading of 6% (July 20th), whereas during the post-1987 bull market, not one day registered a reading below this figure. The point here is that since 1980, lows below 6% in USD/JPY realised volatility have typically been followed over the next year or so by readings above 15% and, on occasion, above 20%.

Could we expect any response from the BoJ were we to see a repeat of today’s events? Certainly, in view of the uncertainty surrounding the health of the Japanese economy, JPY strength is hardly consistent with the Bank’s mandates. It is therefore perfectly possible that the BOJ – guided by the Ministry of Finance - could consider returning to direct intervention. Were this to be considered an option, then we might expect to hear any action presaged by references to the G20’s position on volatility and fundamentals.

This said, it’s also worth noting that the last major event of a similar nature to that seen overnight impacted GBP back in October 2016 and presaged a period of stability. It’s perfectly possible therefore that the move overnight could be followed by period of consolidation for the pair.

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