Explainer: the FX flash crash

Foreign exchange markets have experienced a mini-flash crash, sending waves through markets early on Thursday morning.

Foreign exchange markets have experienced a mini-flash crash, sending waves through markets early on Thursday morning.

The news is raw, but the series of events that precipitated has become vaguely established.

Sentiment was dented after Apple Inc. released a statement this morning stating it is expecting lower revenues in the year ahead.

Of most concern to traders, the company pointed the finger at a weakening Chinese economy as one cause.

The news apparently rippled through currency markets, prompting traders to sell-out of riskier currencies, like those of emerging markets and the Australian Dollar.

A play into safe havens ensued, resulting in an unwinding of the JPY carry trade.

Owing to the time of the day and that Japan is currently on a bank holiday, currency markets lacked sufficient liquidity.

Spreads blew-out suddenly as major market makers pulled their bid and offer prices.

The ultimate consequence was a cascade in prices: a miniature flash crash.

The USD/JPY was down to 105, and AUD/USD broke into the 0.6700-handle.

Trade is beginning to normalize; however, liquidity is expected to remain thin throughout the week with Japanese markets not returning to normal activity until next week.


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