The foreign exchange market is experiencing serious turbulence in the first days of the new year. At the beginning of the Asian trading on Thursday, the Japanese yen added more than 7.5% to the dollar in a matter of minutes. The Australian dollar collapsed by 8% against the yen and by 5% against the dollar for no apparent fundamental reason.
In fact, we saw some kind of forex flash-crash, when markets are experiencing very sharp and significant movements due to the trade in high-frequency computer-driven algorithms. It is worth mentioning that AUD has managed to return a significant part of initial losses. AUD/USD traded by 07:00 GMT at 0.6945, against 0.6980 at the beginning of the day and intraday lows at 0.6635. USDJPY was at 107.0, after failing to 99.90, compared to 108.65 at the start of the day.
Behind such crashes, there is often a combination of unfavorable factors, which strengthens the market’s magnitude: reduced market liquidity, the proximity of significant levels, the presence of a trend.
Market activity remains subdued as most participants have not returned yet after the New year holidays. In particular, the stock exchanges are still closed in Japan. Moreover, the explosion of volatility occurred at the very beginning of the Asian trading, after the closure of the American exchanges and long before the start of the European session.
A decrease of USD/JPY accelerated after falling below 108.0, which has been a significant level for the last 1 ½ years. The decline was even more accelerated when the rates immediately approached 105.
AUD/USD also attracted the attention of the market players, coming up in the previous days to 0.7000, the support level for the last three years and minimums for almost 10 years.
As in the case of JPY, AUD sharp weakening became an extreme development of events but coincided with the existing trend: Markets continue to demand safe-heavens, which is also seen in the rising gold prices and pressure for the world stock markets.
It is hardly expected that the buying after flash-crash in pairs AUD/USD and USD/JPY lead to reverse in trend for decline as the key fundamentals are still in play. In addition, the market showed its vulnerability to drawdowns. In these conditions, there are high chances of further sales on the highs, unless the monetary authorities of Japan will not come out with verbal or currency interventions, fearing the negative impact of the yen’s volatility on the economy.