On May 23, 2018, about a week after Turkish President Erdogan delivered a series of rather disconcerting remarks about his intentions to influence monetary policy during an interview with Bloomberg TV, Japanese retail investors were stopped out of their positions in the lira in thin Asian trading.
The rest of the day was turbulent for the currency, but it was nothing compared to what would ultimately befall the lira by August, when Turkey teetered on the verge of an outright financial crisis.
The reason we bring that up on Monday is because it seems to have happened again. The yen surged in early FX trading as market participants continue to seek safety amid proliferating trade concerns, and the bottom fell out for TRYJPY.
That, folks, is a flash crash.
And here again, it was likely occasioned by retail investors getting caught in a rapid move amid other outsized (albeit much less dramatic) reactions across FX.
At one juncture, the pair was down as much as 12%.
This is also reminiscent of what happened in January. When you hear references to the “flash crash” lows for USDJPY (which were breached on Monday, by the way), don’t forget that the lira was at the heart of that incident. Here’s a trip down memory lane:
(Bloomberg)
Again, this comes amid a series of manic moves across FX occasioned in one way or another by the combination of thin liquidity and traders getting their first chance to express an opinion both on Friday afternoon’s tariff hikes from Trump, and indications over the weekend that the Sino-US spat could worsen.
“Japanese retail investors are throwing in the towel and the kitchen sink for good measure”, Bloomberg’s Mark Cranfield wrote.
While TRYJPY recovered nearly the entirety of the move, Aussie-yen may not be so lucky and as Cranfield suggests, that’s your risk-off proxy.
Incidentally, you’ve got to wonder what the pain threshold for Tokyo is. “Recent JPY appreciation is somewhat comparable in speed with that seen around the start of past interventions, but the USDJPY level is more than one standard deviation above the corporate breakeven rate and JPY REER is still 8% below its 10y average, making it difficult to conclude that there is strong pressure for intervention”, Barclays wrote a couple of weeks back, adding that “even compared with the past several years, USDJPY is still above the 99 low of June 2016 and far from the 78 level where the last intervention occurred, in 2011”.
Still, the bank cautioned that “a move below 105 would put USDJPY below the corporate breakeven rate for four of the 17 industries surveyed by the Cabinet Office, while moves below 100 and 95 would do the same for nine and 16 of those industries, respectively, suggesting verbal intervention could strengthen gradually as levels fall to 105 or lower”. Again, that was two weeks ago, and we’re below 105 now.
Of course, Trump and Abe reached an agreement in principle on trade over the weekend, so it’s conceivable that Tokyo would want to avoid doing anything to undercut that, especially given how sensitive the US president is to the currency issue.
