Australian Dollar Bears the Brunt of Asian Flash-Crash, Now in Recovery Mode vs. Pound and Dollar

Image © kasto, Adobe Stock

- AUD hit particularly hard by Yen surge

- Impact felt right across the AUD space

- Flushing out of AUD/JPY longs exacerbates decline

Australia's Dollar suffered a precipitous drop in early trade on Thursday, January 03 as markets reacted to a corporate warning issued by Apple Inc. which blamed a slowdown in Chinese sales for an expected revenue miss.

The warning triggered an investor stampede into the 'safe haven' Japanese Yen, while the currencies of those countries with a large trade exposure to China suffered, particularly the Australian Dollar:

"Equity markets in the Far East were in risk-off mode, following the cut by Apple Inc. to their revenue outlook. The move is said to be partly responsible for triggering a wave of risk aversion in foreign exchange markets, prompting heavy selling of the Australian Dollar and Turkish Lira against the yen, which in thin liquidity conditions delivered wild swings in currency markets overnight," says Nikesh Sawjani.

The hit on the Australian Dollar-Yen exchange rate (AUD/JPY) quickly spread to other Australian Dollar-based pairs: The Pound-to-Australian Dollar exchange rate spiked to a high of 1.8720 from 1.8040 while the Australian-U.S. Dollar exchange rate plunged to 0.6739 from 0.6984.

"AUD/USD hit its lowest level since the global financial crisis at 0.6741. The resulting adjustment lower in AUD/JPY was even more brutal as it lost around 7% of its value overnight," says Lee Hardman, Currency Analyst with MUFG.

The Australian Dollar is trying to recapture lost ground in the London trading session, and it appears to have successfully done so against Sterling.

However, against the U.S. Dollar we note that the dip has merely cemented the ongoing downtrend in the pair. The outlook is therefore bearish for AUD/USD.

(Note: Markets have recovered somewhat but conditions remain incredibly volatile and pose notable risks, and opportunities for those looking to make sizeable currency transfers. We recommend making contact with a FX specialist to both protect yourself and set yourself up to take advantage of any beneficial moves in the future. Find out here what tools are available to protect against market risks.)

Why the Australian Dollar was Targeted

MUFG's Hardman notes that markets had been increasingly betting against the Japanese Yen in expectation that it would ultimately head south. This is fine if the market behaves and goes where it is expected to go, but when we see a surge in the Yen it should not come as a surprise that many trades are closed out and traders are burnt. This creates a snowball effect.

According to MUFG, a large portion (around a fifth) of the recent build up in short yen positions have been against the Australian Dollar, the flushing out of these positions therefore hurt the Aussie particularly hard.

The Australian Dollar is widely seen to be a reliable and liquid proxy for exposure to everything China, the link is justified by the strong economic integration between Australia and the world's second-largest economy.

Australia's main foreign currency earner is iron ore, the vast majority of which is sucked up by Chinese demand, therefore shifts in fortune for the Chinese economy impact Australia's economy, and by extension the AUD.

Concerns over the U.S.-China trade war have therefore been a source of anxiety for the Aussie Dollar in 2018, and recent data showing a slowdown in China's manufacturing sector have only added to the pressure being piled on the currency.

Apple Inc. blamed their cut to revenue forecasts on the Chinese markets, therefore it made the Aussie Dollar a prime candidate for a deep sell-off.

"The sharp strengthening of the yen and weakening of the Australian Dollar was clearly exaggerated by the flash crash but it does also reflect building fears over slowing global growth particularly in China and Australia," says Hardman.

Hardman says Apple’s warning over slowing growth in China has further heightened investors’ concerns over the slowing global growth outlook.

The developments are favourable for a stronger yen even if the move overnight has been exaggerated.

MUFG warn Japanese policymakers are likely to express concern over the volatility of the yen which could put a dampener on further upside potential in the near-term.

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