Sterling crashed more than 500 pips in minutes at the start of Asian trading hours last Friday.  Was it a case of “Fat-finger”, algorithmic trading systems or … ?

The news in focus for last week was supposed to be the Non-Farm Payroll, but something happened 13 hours before the US jobs data, which shocked the market and had everyone scrambling for an answer.  The sterling plunged hundreds of pips in mere minutes at the start of the Asian session.  It was a shock to the market because there were no scheduled news or official statements at that point in time.  The market settled down after 10-15 minutes later, but the mystery of the plunge remains.  Hours later, theories started to surface.  Some point to possible “Fat-finger”, where dealer made an error while entering the price of an order.  Some point to comments made by French President Hollande, insisting UK must “pay a price” for leaving EU.  While others point to algorithmic trading systems for triggering massive sell orders at a time of low liquidity.  Investigation is still in progress by Bank of England.  Although we do not know what causes the crash, but traders can definitely draw some lessons from it:

  1. Have a Stop Loss in place
  2. Do not over-leverage
  3. Do not trade against the fundamentals

Before the “flash crash”, sterling has been under pressure since the beginning of last week after UK Prime Minister Theresa May gave her clearest statement ever to invoke Article 50 by first quarter of 2017.  The path to exit EU is likely to be bumpy and slow.  UK will gain sovereignty in their policies but they will also need to pay the price for it.  Judging from recent data, UK is benefitting from their weak currency.  We expect upcoming UK data to reflect the benefit of a weak currency.  However, the price to pay for Brexit is likely to weigh down on the sterling.

In midweek, the EUR/USD went through a little roller coaster after headlines reported ECB was considering tapering their quantitative easing (QE) before it ends in March 2017.  EUR/USD shot up briefly, but gave up most of its gain after ECB reacted and denied the tapering topic was discussed.  ECB is still a long way from their inflation target and impact from UK’s exit is unclear.  We expect ECB to continue with their QE until March 2017.

Non-Farm Payroll came in at 156K, fell short of expectation and unemployment went up to 5.0%.  The data is not bad enough to write off a December rate hike completely.  We think the next Non-Farm Payroll would need to be an encouraging number of at least 180K, in order to see a higher possibility of rate hike in December.


Our Picks

GBP/USD – Range bound.  Unless there are fresh news regarding Brexit and Fed rate hike.  We expect GBP/USD to be range bound this week.

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USD/JPY – Slightly bearish.  USD/JPY may retrace towards 102 leading up to the next non-farm payroll.  December rate hike is still on the table.  Possible to consider near term Short or mid term Long.

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XAU/USD (Gold) – Slightly bullish.  Gold sellers may take profit while waiting for the next non-farm payroll.  Possible to consider going Long if price breaks above resistance around 1263.

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Top News This Week (GMT+8 time zone)

Europe: German ZEW Economic Sentiment.  Tuesday 11th October, 5pm.

We expect figures to come in at 3.7 (previous figure was 0.5).

US: Unemployment Claims.  Thursday 13th October, 8.30pm.

We expect figures to come in at 255K (previous figure was 249K).

US: Core Retail Sales.  Friday 14th October, 8.30pm.

We expect figures to come in at 0.3% (previous figure was -0.1%).



Fullerton Markets Research Team

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