Volatility warning after pound's Asia 'flash crash'

Tokyo - The pound suffered a "flash crash" on Friday morning in its biggest drop since Britain's Brexit vote in June, with warnings of further volatility ahead for the beleaguered currency as Asian stock markets retreated.

In early Asian trade sterling plunged more than 6% against the dollar, with experts blaming the sell-off on technical issues or human error.

But some market-watchers said the event illustrated the fragility of the British unit since the country's shock referendum vote on June 23 to leave the European Union.

Sterling fell off a cliff in early trade to hit $1.1841 - its lowest level since mid-1985 - before immediately rebounding to around $1.2450.

It also collapsed against the euro, with the single currency hitting a seven-year high at 94.15 pence, before easing slightly as minutes from the European Central Bank indicated it is unlikely to trim its stimulus any time soon.

"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.

The pound has hit several fresh 31-year lows against the dollar this week, after British Prime Minister Theresa May outlined a timetable at the weekend for Britain to leave the European Union by 2019.

May's comment led French President Francois Hollande to call on Thursday for EU officials to use a firm hand in negotiations with Britain over its exit.

And Yosuke Hosokawa, head of FX sales team at Sumitomo Mitsui Trust Bank, warned there could be more bloodshed to come for sterling.

"We thought today's plunge was a matter of time," he said. "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."

Markets sink

While the British economy has showed signs of improvement in the months since the EU exit vote, there are concerns about the wider long-term impact of the bloc losing its second-biggest economy.

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

Tokyo was down 0.3% in the afternoon and Hong Kong slipped 0.5% by lunch, while Sydney lost 0.3% and Seoul eased 0.5%.

The dollar also retreated against the safe-haven yen.

The fall in sterling was the sharpest since Britain's vote to leave the EU, which sent shockwaves through global markets, wiping trillions off valuations.

The pound tumbled more than 10% against the dollar the day after the vote before quickly rebounding but has lost about 14% since then.

Friday's drop was chalked to exaggerated moves caused by relatively lower volume trading on the pound in Asian markets, while others suggested a so-called "fat finger" issue.

"It seems that a bunch of selling orders came in all together - possibly due to some technical reason - and that sent it plunging in a burst of thin trading ahead of US employment figures (Friday)," Minori Uchida, head of Tokyo global markets research at Bank of Tokyo-Mitsubishi UFJ, told AFP.

"Brexit has returned as a major theme in the market. The currency has stabilised a bit now, but the nervous trading is likely to continue."

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

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.