The foreign exchange market reaches the breaking point
We have had a few 'flash crashes' in the past several years in the currency market but most come at an illiquid time of day or during a holiday.
The latest one has hit right in the heart of the day as everyone holding pounds absolutely liquidates in an increasing sign of market disorder.
A 300-pip gap lower over 20 minutes is nearly unprecendented. It speaks to the massive US dollar funding squeeze that's underway. The is a rush to get into the safety of US dollars from nearly everywhere. I have to wonder if the unprecedented access to FX and dollar-denominated assets globally is a new feature in markets -- even moreso than in the financial crisis.
Right now, US dollar longs are the only thing that's working so investors around the world are absolutely piling in.
In the bigger picture, I think this is a sign of a generalized rise in FX. Maybe that's stating the obvious at this point but FX has been relatively tame until this week.
The thing about volatility is that it tends to last far longer than anyone expects and leads to larger moves than anyone expects.
It looks like it's happening in commodity currencies now with the Australian dollar cratering 5% lower and the Canadian dollar in liftoff.
