When we wrote on Wednesday that it was probably too early to take an aggressive position in the British Pound we apparently weren’t kidding.
Overnight, the British pound crashed, falling as much as ten percent in the early Asian session. This is one of the world’s largest and most liquid currency markets. The pound-dollar pair is the third most traded currency pair in the world, with $470 billion exchanged on a daily basis. For some perspective on that number, Apple, the world’s largest publicly traded company, only trades about $4 billion per day.
What caused the crash in the pound?
The jury is still out, but some analysts are pointing to comments by French President Francois Hollande that the EU should negotiate a hard exit for Britain from the EU. Others are chalking it up to a “fat finger” error and a lack of liquidity in the early morning Asian session. High-frequency automated trading is yet another possible culprit. If it wasn’t the high-frequency traders that caused the flash crash, they most likely contributed to the selling pressure once it began.
The ugly technical setup we referenced on Wednesday no doubt had something to do with the selling as well. Fundamental traders in the currency markets are few and far between. Technical traders, trading systems, and momentum mavens dominate. With the pound breaking through a more than thirty year support line earlier this week and very little support between there and the currency’s 1985 lows, many traders and trading systems were likely looking for an exit.
The pound may now be oversold in the short-run, but there is no reason to be a hero here. Patience is always a worthy ally.
Pound tumbles after flash crash | Market Minute
Jeremy Jones, CFA
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