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Yen Flash Crash Hits Currency Markets

January 07, 2019 12:39

The USD/JPY exchange rate flash-crashed to its lowest level in over two years in its biggest drop since 2009. Mass panic hit the markets, causing a flash crash similar to the British pound selling after the Brexit vote.

Every Japanese Yen currency pair was affected. However, the biggest move happened in AUD/JPY, which crashed over 7% lower in the Asian trading session, as the 5-minute chart below shows:

Source: Admiral Markets MT5 Supreme Edition - AUDJPY, 5 minute chart - Data range: 2 January - 3 January 2019 - Performed on 3 January at 11:24 GMT - Please Note: Past performance is not a reliable indicator of future results, or future performance.

In a matter of minutes sellers took out the 2016 low, 2011 low and then the 2010 low as the weekly chart below shows:

Source: Admiral Markets MT5 Supreme Edition - AUDJPY, Weekly chart - Data range: 2 March 2003 - 3 January 2019 - Performed on 3 January at 11:25 GMT - Please Note: Past performance is not a reliable indicator of future results, or future performance.

What caused JPY's flash crash?

While there is no single reason that caused mass panic in the market, there are some clues as to why the moved happened.

1. Apple's China news

Apple's CEO, Tim Cook, gave a rare warning on the company's future revenue. The iPhone maker cut its revenue forecast - marking its first downgrade in nearly 12 years. The reason given was sales problems in the Greater China region, which accounts for almost 20% of the company's revenue.

The market already had some concerns regarding Chinese economic growth and the impact of US president Donald Trump's trade tariffs. However, with the CEO of the world's largest consumer company saying they "did not foresee the magnitude of the economic deceleration in Greater China", investors rushed to safe-haven currency plays like the Japanese Yen, while simultaneously dumping Apple stock in premarket trading.

2. Low liquidity

The aggressive buying of the Japanese Yen, and dumping of the Yen crosses, occurred after the New York session closed and before 8am in Tokyo. This can be an illiquid time of the day as major institutional players aren't behind their desks to execute trades.

However, what exacerbated the move was the fact Japan are on a week-long bank holiday, so Japan's central bank traders were not there to intervene. Trading algorithms can also cause violent moves in low-liquidity conditions, as there can be multiple systems firing off a lot of orders all in the same direction very quickly.

How traders could have taken advantage

A trading quote often pinned on the walls of many trading floors is the fact "anything can happen, at anytime". With anything happening to the JPY, how could you have traded?

To use the most extreme price movement as an example, if you had have opened a short trade on one lot of the AUD/JPY at 00:30 EET on January 3 and closed the trade just 10 minutes later at 00:40 EET at 71.053, at 1:30 leverage you would have made a profit of USD4,377.31.

Traders who opened a long trade at the low of 71.053 and held that trade until the currency pair climbed to 74.028 at 01:04 EET would have made a profit of USD2,761.34.

However, keep in mind that extreme volatility leads to extreme risk, especially when trading leveraged instruments like CFDs. This is why using risk management tools like stop loss orders and take profit orders can be useful to both protect against losses but also to bank any profits.

With 2019 starting off with a bang how are you preparing for the next opportunity?

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