Sadly, up until Thursday's flash crash in the GBP, the biggest news of the week was that Kim Kardashian was robbed of $6.7 Million at gunpoint by fake cops in a luxury Paris hotel. The GBP finished the week nearly 600 pips of its flash crash lows after it collapsed by 6% in less than 5 minutes at around 7 pm EST on Thursday. The GBP fell to a low of 1.1841 from the 1.26 level, while one electronic trading platform reportedly recorded 1.1378 (performance against USD).
What caused the crash? One theory was that computer-driven algorithmic systems – known as algos - programmed to sell the pound on negative Brexit headlines latched on a report in the Financial Times quoting the French president, François Hollande, as saying that Britain would have to suffer for the Brexit vote in order to ensure EU unity. Another theory was that the fall may have been linked to a technicality, the expiry of foreign exchange options on Friday.
One theory being bandied about is that Prime Minister Theresa May's speech, at last week's Conservative Party conference, had fueled anxieties about the UK's future. May set out an economic vision designed to address working-class concerns over perceived failures of globalization and she appeared to have taken a shot at the independence of the Bank of England with criticism of its quantitative-easing program by saying the Bank's policy of printing money had created 'bad side effects'. May said that while the policies had been necessary in the wake of the financial crisis, they had been damaging to savers, pensioners and the young. She added: 'A change has got to come.' Whatever the real reason was, we may never find the answer because the foreign exchange market has no central trading system, which makes it difficult to track transactions.
Interestingly, also making headlines last week was talk of an ECB taper. Bloomberg reported that the ECB will probably gradually wind down bond purchases before the conclusion of quantitative easing, and may do so in steps of 10 billion euros ($11.2 billion) a month, according to Eurozone central-bank officials. Bloomberg cited that an informal consensus has built among policy makers in the past month that asset buying will have to be tapered once a decision is taken to end the program, the officials said, asking not to be identified because their deliberations are confidential.
PM May's comments along with the unnamed Eurozone central bank officials suggests that there could be shift in the unconventional stances of the major central banks. Elsewhere in the world, QE and easy monetary policy in general are moving in the opposite direction. Last month, the Bank of Japan effectively abandoned its balance sheet target in favor of yield-curve targeting while, the Fed is focused mainly on the speed at which interest rates will rise towards equilibrium. Taken at face value, the era of unlimited global QE seems to be ending which could mean that peak liquidity is upon us. Thus, long-term bonds will fall out of favour, equities will receive less "stimulated" help from central banks, and the USD will move higher.
The USD has made some serious noise just this week alone and seems to be breaking out – it has broken above the 100-day moving average against the yen and NZD, it has taken out the 200-day moving average against the Swiss franc and the Canadian dollar, and it managed to trade to the 200-day moving average against gold.