Euro Jumps 1.6 Percent in Minutes as Algo Orders Surprise Market

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The euro surged as much as 1.6 percent against the dollar in the Asian morning Friday as a rush of computer-generated orders caught traders off guard.

The sudden move started under $1.05 and algorithmic orders snowballed above that level, causing what little liquidity there was on the year’s last trading day to vanish, according to foreign-exchange traders. In minutes, Europe’s single currency jumped to a high of $1.0653, forcing some dealers to take losses to cover positions.

Euro Surge Amid Thin Liquidity Evokes Sterling Memories: Chart

“The market automatically ran through stops” as the euro rose, said Sebastien Galy, a strategist at Deutsche Bank AG in New York. “As activity falls sharply during the year end period, it takes a larger currency move to reach some fundamental demand.”

The spike came amid signs that the dollar rally since Donald Trump’s election may be over-extended, with the S&P 500 Index and Treasury yields indicating they may have topped out in mid-December when the Federal Reserve raised benchmark rates. The greenback is on track to drop against most of its major peers this week. Since Nov. 8, the dollar has climbed about 11 percent against the yen and about 4 percent against the euro.

“Markets are extremely thin and perhaps position turning occurred,” said Shigeki Yoshitoshi, head of Japan foreign-exchange and commodities sales at Australia & New Zealand Bank Group Ltd. in Tokyo. The more gentle decline in dollar-yen at the same time was led by the euro, and suggested that there wasn’t a broader shift toward risk aversion, he said.

The sharp move in the world’s most-traded currency pair punctuated a year that’s seen several unexpected moments of extreme volatility, most notably the pound flash crash in October. During that event, the British currency dropped more than 6 percent against the dollar in two chaotic minutes also in early Asian trading, exacerbated by a rush of computer-driven sell orders amid thin liquidity.

The euro was accompanied by the franc in its surge Friday, with the Swiss currency also spiking 1.6 percent against the dollar. The yen climbed as much as 0.4 percent. Some traders were holding shorts from stop-loss buy orders through the $1.0539 high touched on Dec. 15, while at least one trader had only anticipated the euro hitting $1.0550 with his positions.

An hour later, the currencies had pared gains and traders were swapping stories on who had come out ahead in dealing rooms. The euro was up 0.7 percent as of 10:36 a.m. in New York. The yen had flipped to a 0.2 percent loss from a 0.4 percent advance.

Contracting volumes in the $5.1 trillion-a-day foreign exchange market have coincided with surging volatility and more cases of violent market moves, the Bank for International Settlements said in a report earlier this month. There is concern that extreme price swings will become increasingly common, with Boston-based consultant Aite Group estimating algorithmic transactions have more than tripled in the past three years.


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