Jan 3, 2019 1:00 am -08:00
Flash Crash Moves in Thin Liquidity
As I mentioned yesterday, the latest Chinese Caixin Mfg. PMI served as a reminder that the global growth outlook is indeed deteriorating. This was once again reaffirmed after the largest company in the world, Apple, cut their guidance amid soft sales in China. While this of course added to the risk sentiment and thus keeping safe haven currencies bid. Among the major factors behind the swings in major JPY pairs had been thin liquidity, as a reminder, between the NY close and the full Asia open (3hr timeframe), this is the most illiquid period in the 24-hour trading cycle. This would have further been exacerbated by the fact that Japan were away on holiday. Of note, with Japanese market reopening tonight, keep an eye out on potential talk that the BoJ, MoF and FSA have met in regard to recent JPY volatility.
Huge AUDJPY & TRYJPY Stops Taken Out
The move in JPY pairs had stemmed from huge stops taken out in AUDJPY and TRYJPY, which crashed over 6% and 9%. Consequently, AUDUSD plummeted to its lowest level since the financial crisis at 0.6740, while USDTRY gapped higher at the open. Elsewhere, USDJPY briefly broke below 105.00 with some data vendors suggesting it hit a low of 104.10, subsequently hitting my 2019 USDJPY target of 105.00 a lot sooner than expected. While much of these moves have been pared, the Japanese Yen does remain very strong across the board with USDJPY hovering just south of the 108.00 level.
Liquidation of JPY Shorts
The latest move in the Japanese Yen will also make the next few CFTC reports a lot more interesting. As noted yesterday, the most recent data from December 21st showed that JPY was the most shorted currency in the G10 space among speculators, which accounted for a 3rd of USD longs. As such, major JPY crosses can be left vulnerable to a liquidation of short JPY.
Source: Reuters. CFTC Speculative Positioning.