Here is exactly why the pound crashed

Author: Adam Button | Category: News

This is a market event, not a reaction to the news

The question everyone is asking right now is: why?

It's what people are asking us right now.

Here is the answer, but I'm afraid you aren't going to like it.

This is how markets work. Or rather, how they don't always work they way they should.

Sentiment against the pound is at generational lows. It's an ugly scene and a total lack of confidence was brewing for awhile. You have Theresa May sounding like a Communist, Larry Fink is warning that business are pulling out or not investing. You have total uncertainty on what a post-Brexit UK will look like and then you have the pound already at 31-year lows, completely lacking technical support.

Cable was like Europe at the dawn of WWI. It was a tinder box ready to implode.

We will probably never know who was the metaphorical assassin of Archduke Franz Ferdinand but people always point to the last headline and in this case it was Hollande saying Europe will take a hard line.

"There must be a threat, there must be a risk, there must be a price. Otherwise we will be in a negotiation that cannot end well," he said.

It's nothing particularly new, we've heard that a million times before and, in any case, Hollande won't be around for the negotiating.

The pound was teetering on a cliff and maybe that was the gust of wind to blow it over.  More likely it was an algo gone haywire. Or a fat finger. Or maybe an order that couldn't be swallowed and a series of stops. In all likelihood we will never learn the answer to why the pound fell 6.1% in two minutes and three seconds.

The thing is, it wasn't entirely unpredictable (although the size was still astonishing). Here is what I wrote on Monday:

What's especially worrisome is that the decline came on news that was only moderately bad. PM Theresa May confirmed that Article 50 will be triggered in the first quarter of 2017 but that's not a big surprise. It was rumored and semi-leaked several times before it was confirmed.

To me, the sharp decline on news that should have been largely priced in points to a market that has no appetite for buying GBP until the Brexit picture clears. It suggests the market is entirely distrustful of a series of solid data releases in the past 8 weeks and expects economic weakness in the months ahead.

It's at times like this that a brutal washout can hit and with the July low nearby, it may come sooner rather than later.

I reiterated it again later, in even clearer terms:

To me, it looks like some kind of brutal washout is in the offing.

Finally, there's a chance it could have been predatory. Someone could have been sitting on a trading desk with an order to sell £2-3 billion order to sell. He may have thought, you know what, let's fire it all off at once and see what happens. Better yet, he may have sold a bit for the bank's account (or his own) and hit the button.

Whatever it was, this isn't something that's unheard of. When markets get extremely stressed and confidence evaporates, black swans happen far more than they should.