Flash crash scythes 6% off pound

The pound suffered a "flash crash" in Asia Friday on a computer-generated sell-off in the beleaguered currency, as tough talk from French President Francois Hollande underscored the perils ahead for Brexit-bound Britain.

The magnitude of the six percent plunge showed there was likely further volatility ahead for sterling, which has been hammered this week after the British prime minister set out a timetable to leave the European Union.

In early trade the pound fell off a cliff to hit a 31-year low of $1.1841 before immediately rebounding to around $1.2450.

The euro also hit a seven-year-high 94.15 pence, before easing slightly, as minutes from the European Central Bank indicated it is unlikely to trim its stimulus any time soon.

Speaking Thursday, Hollande said the EU should take a tough line with London during exit talks in order to prevent the break-up of the bloc.

"There must be a threat, there must be a risk, there must be a price, otherwise we will be in negotiations that will not end well and, inevitably, will have economic and human consequences," he said.

"Britain has decided on a Brexit, I believe even a hard Brexit. Well, we must go all the way with Britain's willingness to leave the European Union.

"We must have this firmness".

IG Markets' analyst Angus Nicholson said it "looks like it was an algorithm-driven flash crash" driven by the comments from Hollande. "Given low volumes in the Asian session, it would have forced other algorithms to join in and magnify the fall".

And Jeffrey Halley, senior market analyst at OANDA, added: "Following comments this morning from ... Hollande demanding 'tough' Brexit negotiations, GBPUSD finally managed to break $1.26 support.

"What followed next was nothing short of astounding."

British Prime Minister Theresa May outlined a timetable at the weekend for Britain to leave the European Union by 2019, sending the pound plunging against its major rivals throughout the week.

It is now down around 14 percent against the dollar since the EU exit vote, though it is still well off its record low of $1.05 seen in early 1985.

- 'Insane' -

"What we had was insane -- call it a flash crash -- but the move of this magnitude really tells you how low the currency can really go," Naeem Aslam, chief market analyst of Think Markets wrote in a commentary.

"Hard Brexit has haunted sterling," he said, according to Bloomberg News.

While the British economy has shown signs of improvement in the months since Brexit, there are concerns about the wider long-term impact on the bloc losing its second-biggest economy.

Yosuke Hosokawa, head of FX sales team at Sumitomo Mitsui Trust Bank, warned: "We thought today's plunge was a matter of time.

"Negative factors were mounting against the pound, and eventually the dam broke. We have not seen the bottom yet. Breaking the 31-year low is now in sight."

The fright in foreign exchanges was reflected on Asia's stock markets as investors fled high-risk assets, with losses across the board.

Tokyo ended down 0.2 percent and Hong Kong slipped 0.4 percent, while Sydney closed 0.3 percent lower and Seoul eased 0.6 percent.

In early European trade London rose 0.4 percent on the weaker pound but Frankfurt lost 0.5 percent and Paris shed 0.4 percent.

The dollar also retreated against the safe-haven yen.

"Sterling's crash seems to have affected sentiment across Asia," Margaret Yang, an analyst at CMC Markets in Singapore, told Bloomberg News.

The next test for sterling will come later in the trading day when the US is due to release a key jobs report, with a healthy reading expected to strengthen the Federal Reserve's case for hiking interest rates before the year's end.

- Key figures around 0800 GMT -

Pound/dollar: DOWN at $1.2432 from $1.2614

Euro/pound: UP at 89.42 pence from 88.42 pence

Euro/dollar: DOWN at $1.1116 from $1.1153

Dollar/yen: DOWN at 103.87 yen from 103.95 yen

Tokyo - Nikkei 225: DOWN 0.2 percent at 16,860.09 (close)

Hong Kong - Hang Seng: DOWN 0.4 percent at 23,851.82 (close)

Shanghai - Composite: Closed for holiday

London - FTSE 100: UP 0.4 percent at 7,025.57

Oil - West Texas Intermediate: UP 22 cents at $50.66 per barrel

Oil - Brent North Sea: UP 25 cents at $52.76

New York - DOW: DOWN 0.1 percent to 18,268.50 (close)

Source: AFP