On Monday during the Tokyo session, the Swiss franc (CHF) was aggressively sold. The USD/CHF pair, for instance, touched the 1.0106 level. This was a high that the pair last reached in November last year.
On the other hand, the Euro/Swiss Franc (EUR/CHF) pair touched the 1.1422 mark. Against the Japanese yen, the franc fell to 108.80 while against the sterling pound it touched the 1.3056 level.
But within a matter of minutes, the sharp moves were reversed. For the USDCHF it resulted in a trading range of over 100 pips. This was more than double the average daily trading range of the pair which is known for lack of volatility.
The mini flash crash experienced by the Swiss franc was attributed to low liquidity as markets in Japan were closed for the National Foundation Day. According to National Australia Bank’s senior forex strategist, Rodrigo Catril, traders have learned to watch out for such sudden movements. This is especially so whenever there is a bank holiday in Japan, per Bloomberg:
Lack of liquidity is a common factor in these events. Traders and strategists now have Japan holiday calendars printed in big font at their desk!
Another likely cause of the flash crash was the return of Chinese investors. These investors likely had large orders pending and the situation was made worse by the existence of thin liquidity. This was according to an analysis conducted by forex broker XM:
Remember that Chinese investors returned today after an entire week of being on holiday, and so may have had several older orders pending, while Japanese markets were closed on the day, exacerbating the illiquidity.
Algorithmic-based trading may also have been to blame where a data entry error may have set off trades. In the stock markets trading bots have also been proven to be fallible.
The mini flash crash comes at a time when the Swiss franc has been weakening due to an increase in carrying trades. Basically, these are trades where a currency with a high yield funds trade with a currency bearing low yield.
In this case, the Swiss franc is increasingly being used to purchase currencies with higher yields. Some of the currencies that are high-yielding at the moment include the Russian rouble and the Turkish lira.
The rise in carry trades has coincided with the U.S. Federal Reserve hesitating to raise interest rates, per Reuters. Investors have thus had to look for better-yielding opportunities, according to Deutsche Bank’s strategist, Robin Winkler:
Many investors, above all hedge funds are carrying out carry trades. They are borrowing cheap money and investing it in currencies with high interest rates like the Turkish lira, Russian rouble or in Latin America.