In the latest episode Wednesday, a message from the U.S. Federal Reserve that it is in no hurry to raise interest rates caused a big slump in the dollar, which has run up a huge rally so far this year. The euro surged more than 4% against the buck, its biggest jump in a single day in 15 years, according to Deutsche Bank. Early on Thursday, the European currency resumed its slide.
The sheer speed of the round trip in the euro-dollar exchange rate—the world’s most heavily traded currency pair—left traders and investors reeling.
We profiled the staggering move in real-time as it was happening:
Again, this is the world's reserve currency, not some two-bit backwater currency pair. It was, also, a stunning, unheard of event.
This is how the rest of America's traders saw it, from the WSJ:
“I haven’t seen anything like it since the financial crisis,” said Paul Lambert, head of currency at Insight Investment, which manages $480 billion of assets.
Traders said Wednesday’s move brought back memories of January’s surge in the Swiss franc, when the currency climbed more than 40% after the Swiss central bank abandoned its policy of capping the franc’s strength against the euro. For a few minutes on Wednesday, the lack of dollar buyers caused a short-term freeze in electronic trading platforms, according to a New York-based trader at a major currency-dealing bank. “There was a lot of shouting on the desk, a lot of nervousness,” the trader said.
“The dollar has been experiencing fastest pace of ascent in 40 years. Our long-term outlook for the euro is still lower, but risk here is for a decent pullback,” said Matthew Cobon, head of interest rates and currencies at Threadneedle Investments in London, which has a total $54.3 billion of assets. Mr. Cobon had bet on a bounce back for the euro ahead of Wednesday’s Fed meeting.
None of this was unexpected, if only to our readers: recall that as we showed in the start of the year, the short 10Y and the long USD were the two most crowded, biggest consensus trades across the spec investor community, perhaps in history.
But while everyone got crushed on the Short 10Year trade shortly thereafter, the USD trade kept working... until Wednesday, when the entire groupthink monorail slammed into a brick wall.
So now what? Well, more of the same... and prayer.
The sharp swings also raise a now-familiar complaint from investors: Regulations brought in after the financial crisis have dried up the liquidity in markets, by crimping banks’ ability to carry risky bets on their balance sheets.
On Wednesday, the Bank for International Settlements became the latest major authority to caution that a lack of liquidity could lead to major disruptions in financial markets.
“When flow hits the market, there’s no buffer, so it translates straight into big price moves,” said Mr. Lambert at Insight Investment. During the financial crisis, big swings were sparked by fears of a collapse of the banking system. Similar moves can now result from a minor reassessment of the Fed’s rate-increase plans, according to Mr. Lambert.
So to summarize:
- the stock market flash crash of May 6, 2010
- the Treasury bond flash crash of October 15, 2014
- and now the US Dollar flash crash of March 18, 2015
And all of this happening as the "market" is rising, and as of today, poised to set new all time highs.
What happens when the real selling actually begins, and what little liquidity exists even now, is completely gone. The answer? Exchanges will simply close down and refuse to open or satisfy any asset liquidation demands, indefinitely, until either the Fed can once again bailout the system, or when the US government finally makes the sale of any asset, illegal.