Three things caused the flash crash in forex market
Yen makes an incredible move
Yen crosses collapsed 3-5% in minutes as an enormous wave of yen buying swept through the market. There is not going to be a single factor behind this move. It's the kind of move you see once every few years. The last time something like this happened was a flash crash in GBP after months of selling post-Brexit.
There's going to be a big conversation about liquidity and algos and market integrity coming out of this (or at least there should be) but for now that doesn't matter. Here's what set the stage for the drop:
1) It's the quietest time of the day
It's before 8 am in Tokyo and New York had gone home for the day. If you're ever looking for a flash crash in the FX market, between 4-6 pm ET is the time. What made it especially bad is that it's a bank holiday in Japan all week.
2) Apple's China news
The market was suspicious of China but Tim Cook came right out and pointed the finger, saying that a sharp macroeconomic slowdown there was almost-entirely responsible for a roughly 10% drop in revenue guidance. Given how much people love their iPhones, what does that say about the rest of the consumer market in China.
3) The yen was already near extremes
The tipping point was because the yen was already near extremes on several fronts. The most-obvious one is AUD/JPY and that was also the big mover. It crumbled to the lowest since 2016 and hit stops, then took out the 2016 low, then the 2011 low, then the 2010 low. That set off waves of mechanical orders. That would have spread to other yen crosses as they hit multi-month lows (at the very least).
There's no smoking gun here and other markets have weathered this in decent fashion. This looks to be more of a liquidity story and that means it could recover. Watch the 61.8% retracement of the AUD/JPY drop at 73.85 for a short-term signal.