Sterling drops like a stone

Sterling dropped like a stone during Asian trading hours, mimicking the volatility seen in the South African rand and New Zealand dollar at the start of the year, with traders possibly trying to front-run further weakness, especially as Westminster and the European Union staked out their initial bargaining positions.

At one point during the session, cable lost 6.1% to hit 1.1841, with one transaction having reportedly been crossed at 1.1378.

As of 0934 BST it was down 1.46% to 1.2433 and the yield on the benchmark 10-year Gilt was higher by ten basis points to 0.97%.

Initial market commentary appeared to focus on thin liquidity conditions, together with increased activity from algorithmic traders, as the chief triggers behind the move.

The suspicion was that recent large, sudden and unexpected moves in one of the world´s most heavily traded currency crosses might have 'snow-balled' as automatic trading systems were forced to undo some of their trading positions in order to limit their losses, thus accelerating the slide.

Acting as a backdrop, some traders referenced newspaper reports regarding hawkish remarks from France´s President in the run-up to the start of the Brexit negotiations, mirroring perhaps the initial negotiation stance taken by Westminster.

Nevertheless, analysts at JP Morgan gave short shrift to such explanations, pointing instead to the latest Conservative party conference, which dashed hopes of a softer Brexit that might minimize the longer-term damage to the UK economy.

Some of those investors might now be starting to re-assess their positions, the investment bank said.

"The post-mortem on GBP’s alarming overnight slide indicates that the move was on high volume so it’s hard to justify this as a fat-finger move, more a one-way market where selling was exacerbated by a cascade of stop-loss activity, including from option market makers," said JP Morgan.

"As the UK’s gross foreign liabilities stand at over 400% of GDP, with central banks owing over 20% of GDP, the GBP market will not be capable of absorbing any form of material repatriation without triggering a material price adjustment. And as reminder, there is little the BoE can do to arrest such one-way price action given that it’s net FX reserves stand at only £36bn, or just under 1.5% of GDP."

For his part, Naeem Aslam at Think Markets chipped in: "What traders are expecting is that the BOE will come out and support the currency by their jawboning. A fall of this magnitude is clearly spooking investors from the equity market [...]

"In terms of volume, today could turn out to be extremely heavy day. At the same time what speculators will also be looking at will be the news for any casualties due to the flash crash event of last night. It is very common to hear such news, especially when the market is not prepared for any such move."