(Bloomberg) -- Panic reigned in currency markets as orders from
traders and algorithmic machines snowballed to spur some of the
biggest moves since the global financial crisis.
As markets reopened after a weekend filled with crisis headlines,
the yen soared to approach the key 100 level against the greenback.
Risk and commodity currencies from Australia to Norway and Mexico all
plunged within the first few hours of trading.
“Markets are screaming that there is a pending recession,” said
Stephen Miller, adviser at GSFM, a unit of Canada’s CI Financial
Group. “People can’t seem to get enough of the likes of yen and
gold, and dumping the Aussie and commodity currencies that are vulnerable
to global growth risks.”
Investors are taking cover in the safest assets as the collapse in crude
prices adds to the risk to the global economy from the
spreading coronavirus outbreak. Italy locked down part of the
country over the weekend, reinforcing the growing concern about the virus.
Crude prices dived more than 30% at one point with the breakdown of
the relationship between Saudi Arabia and Russia expected to lead
to far-reaching economic consequences. That sent oil-exporting
currencies such as the Norwegian krone and the Canadian dollar plunging
from the start of trading on Monday.
The wide-spread selling of more than a dozen currencies erased any benefits
that the Federal Reserve’s emergency rate cut last week had engineered.
Traders say clients were rushing to take risk bets off the table.
Liquidity Hunt
Algorithmic machines sold the Australian and New Zealand dollars across
multiple bank platforms in a desperate hunt for liquidity, traders said.
It drove Treasuries to new highs, with the entire yield curve already
trading under 1%.
The Australian dollar plunged by almost 5%, the biggest one-day decline
since 2008, to as low as 0.6313 against the greenback. The kiwi fell by
more than 5% to its weakest since May 2009. The yen soared more than 3%
to 101.57, approaching the 100 level that traders speculate could prompt
the Bank of Japan to intervene.
Traders were caught out.
A Sydney-based investor bought the Aussie at 0.6450 per dollar before
stop-loss orders were triggered at 0.6350. The result: a $50,000 loss
within seconds.
“This looks to be a repeat of the January 3 flash crash,” said
Stuart Simmons, senior portfolio manager at QIC Ltd., referring to the
sell-off in the yen in early 2019. “When they start triggering stop
losses, the currencies end up cascading on themselves -- there are no
circuit breakers. Price action turns dysfunctional.”
A Japanese finance ministry official said the government is monitoring
markets with a sense of urgency. Officials from Japan’s central bank,
Finance Ministry and Financial Services Agency will meet at 3:30 p.m. in
Tokyo to discuss global financial markets.
“The yen’s surge won’t stop unless Japanese authorities start to talk
it down,” said Masakazu Satou, a currency adviser at retail FX brokerage
Gaitame Online in Tokyo. “The market is very concerned over the spreading
of the virus in the U.S -- the yen’s uptrend will pick up momentum if it
breaks through 100 against the dollar.”
Pain Trade
The pain was even greater for emerging-market currencies.
Mexico’s peso slid more than 8% against the dollar to the weakest in more
than three years, while the South African rand slumped 7.8%.
“The mantra now is take any risk off the table,” said Tsutomu Soma, a bond
trader at Monex Inc. in Tokyo. “Misfortunes seldom come singly is how it feels right now.”
Read More: Bleak Start to Week for Emerging Markets as Peso, Rand Slump
Monday’s yen surge also wrong-footed Japanese retail investors .
The currency surged to all-time highs against the rand and Mexican peso,
two favored currencies among Japanese retail punters. That’s after margin
accounts just last week boosted their net long positions on these currencies
to the highest level since at least December, according to the latest data
from the Tokyo Financial Exchange Inc.
“Markets are in a sort of a panic, with selling inviting further selling,”
said Kengo Suzuki, chief foreign-exchange strategist at Mizuho Securities Co.
in Tokyo. “Speculative moves are the biggest driver. Fears are growing and it’s not over yet.”