Yen surges on foreign exchange flash crash

Summary:

• Japanese yen soars while Australian dollar tumbles during Asian hours trading

• Thin liquidity and Apple’s announcement among reasons behind a flash crash

• US Congress fails to end a 12-day long government shutdown

Off the charts

The Japanese yen surged in early Asian trading on Thursday and this move was seen not just against the US dollar. The yen was in demand both against its major peers and other EM currencies like the Turkish lira. The biggest moves were seen in the AUDJPY (down 8%) and the TRYJPY (down 10%). Why we saw the rally in the Japanese currency? Well, one may point to numerous reasons but most of them are rather technical than fundamental. First and foremost, the crash occurred during Asian hours trading when Wall Street was already closed while the Japanese market was not open due to a holiday. It means that only interbank markets in Australia and New Zealand acted as usual. As a result, liquidity was really thin (even thinner than during normal Asian hours trading) and lack of any releases in the macroeconomic calendar might have encouraged traders to pay attention to this event.

The second possible reasons was the Apple’s announcement which weighed on its shares substantially on Wednesday. Namely CEO Tim Cook wrote in a letter to investors that the company had cut its first quarter revenue guidance to $84 billion from $89/$93 billion. The profit margin was also slashed to about 38% from between 38% and 38.5%. Apple blamed various factors behind this decision and the weakening Chinese economy was placed among the most important ones. The company added that the lower-than-expected revenue happened “primarily in Greater China” and said that “the upgrades to new iPhone models in other countries were not as strong as we thought they would be.” On top of that, Apple wrote that an economic weakness in some emerging markets turned out to be more severe than it had projected. Finally, the strong US dollar was to undercut Apple’s revenue as well. Taking into account that the China’s market is so important for Apple and adding that Asian currencies are extremely vulnerable to any news concerning China, one may sum up that the Apple’s report coupled with thinner than usual liquidity could have been enough to spur the wild rally in the yen. Let us also remind that on Wednesday we got disappointing China’s manufacturing PMI which may have added to downward pressure as well.

The AUDJPY crashed during Asian hours trading over fears regarding the Chinese economy after the Apple’s announcement. The pair tumbled and touched its lowest post since June 2016. Source: xStation5

Shutdown continues

The new year has yet to bring an end to the 12-day long US government shutdown as Congressional leaders were unable to strike a deal at a meeting with US President Donald Trump on Wednesday. Trump invited them to return to the White House on Friday for further negotiations. Democrats, the party is taking control on the House on Thursday, said that they would pass legislation to reopen the government as soon as today, pressuring Senate (led by Republicans) to follow suit. Let us recall that the major sticking point is a Trump’s demand to get $5.6 billion for a wall with Mexico.

The US dollar index keeps trading off its highs. Assuming that it remains clearly overvalued one may expect that the march toward lower levels could be continued. Source: xStation5

In the other news:

• US 10Y yield falls to below 2.63% on the back of a huge demand for safer assets

• China’s press reported that new stimulus measures were being considered (also potential cuts of a reserve requirement rate)