Euro jumps 1.6% in minutes in Asia trading on rush of computer-driven orders

SYDNEY (BLOOMBERG) - The euro surged as much as 1.6 per cent against the US dollar in the Asian morning on Friday (Dec 30) as a rush of computer-generated orders caught traders off guard.

The sudden move started under US$1.05 and algorithmic orders snowballed above that level, causing what little liquidity there was on the year's last trading day to vanish, according to foreign-exchange traders. In minutes, Europe's single currency jumped to a high of US$1.0653, forcing some dealers to take losses to cover positions.

"Markets are extremely thin and perhaps position turning occurred," said Shigeki Yoshitoshi, head of Japan foreign-exchange and commodities sales at Australia & New Zealand Bank Group in Tokyo. The more gentle decline in dollar-yen at the same time was led by the euro, and suggested that there wasn't a broader shift toward risk aversion, he said.

The sudden move comes amid signs that the US dollar rally since Donald Trump's election win may be over-extended, with the S&P 500 Index and Treasury yields indicating they may have topped out in mid-December when the Federal Reserve raised benchmark rates. The greenback is on track to drop against all its major peers this week. As of the end of last week, it had climbed nearly 12 per cent against the yen, and around 5 per cent against the euro and franc since Nov 8.

The euro was accompanied by the franc in its surge, with the Swiss currency also spiking 1.6 per cent against the dollar. The yen climbed as much as 0.4 per cent. Some traders were holding shorts from stop-loss buy orders through the 1.0539 high touched on Dec. 15, while at least one trader had only anticipated the euro hitting 1.0550 with his positions.

"It could be stops taken out in thin liquidity," said Simon Pianfetti, a senior manager at the market solutions department at SMBC Trust Bank Ltd. in Tokyo. "But it's still a big move."

An hour later, the currencies had pared gains and traders were swapping stories on who had come out ahead in dealing rooms. In the Asian afternoon, the euro was up 0.4 per cent, while the franc was 0.3 per cent higher. The yen had flipped to a 0.2 per cent loss from a 0.4 per cent advance.

The sharp move in the world's most-traded currency pair punctuates a year that's seen several unexpected moments of extreme volatility, most notably the pound flash crash in October. Again in early Asia time, the British currency dropped more than 6 per cent against the dollar in two chaotic minutes, exacerbated by a rush of computer-driven sell orders amid thin liquidity. There is concern that such price swings will become increasingly common, with Boston-based consultant Aite Group estimating algorithmic transactions have more than tripled in the past three years.