ETF Securities Research Blog

GBP takes a mysterious pounding

The overnight flash crash for Sterling suggests that thin liquidity and computerised trading algorithms were at play, after a sharp 6% decline pushed Sterling to 31-year lows. While the trigger for the GBP plunge remains uncertain, we can, with a good degree of certainty, rule out that fundamental information was the cause.

Currency trading in the Asian session (when the crash occurred) is typically lighter than the European or US sessions for GBP in terms of liquidity. GBP traded a narrow range in yesterday’s European and US sessions, suggesting that there was little in the way of new fundamental information available for currency traders. Potential causes for the GBP plunge were large derivative positions being triggered, algorithmic trading or just human error, the so-called ‘fat finger’.

While investors remain bearish on Sterling, and with good reason, we feel that the prior 15% move down since the EU Referendum fully priced in the bad economic news to come. Futures positioning remains weak, but has not extended. Additionally, we have not seen any large bearish changes in exchange-traded product (ETP) flows, something that usually occurs when fundamental information is behind the currency moves.

Indeed, investors in the ETP space have started to believe that GBP was making a floor, based on fund flows. Currency ETPs tracking short GBP exposures recorded the most significant outflows in two months, with US$12mn withdrawn last week. Meanwhile, inflows into ETPs tracking long GBP exposures were the largest in over two years, since June 2014, recording over US$3mn last week.gbp-flows

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