Market Extra: The Swiss franc suffers a mini ‘flash crash’: Here’s what happened

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The Swiss franc suffered a sudden but short-lived drop across the board during Asian trading hours Monday, with the move seemingly coming out of nowhere and reminding traders of previous so-called flash crashes.

So what happened?

In early Asian trade, the Swiss franc dropped sharply versus major rivals. The U.S. dollar USDCHF, +0.5908%  jumped as high as 1.0095 francs, its highest since November, before falling back to a session low of 0.9991 less than an hour later, according to Dow Jones Market Data. The dollar fetched 1.0039 francs in recent action, up 0.4% on the day.

The euro/Swiss pair EURCHF, +0.0265%  also saw a roughly 1% swing, with the shared currency jumping as high as 1.14205 francs before dropping back to a session low of 1.13115. The euro was recently off 0.1% at 1.1325 francs.

The British pound-franc GBPCHF, -0.2704%  and franc-Japanese yen CHFJPY, +0.26% pairs, saw similar trading action.

Traders were reminded somewhat of the January 2015 flash crash, although in that case it was the franc that soared versus its rivals after the Swiss National Bank unexpectedly abandoned a floor for the euro/Swiss pair at 1.20 francs. That move, however, was far more cataclysmic than Monday’s action, with the franc surging more than 20% versus the euro and sending shock waves through global financial markets. Monday’s Swiss dip caused barely a ripple.

Market participants said the franc’s sudden tailspin came about due to a lack of liquidity. A lack of liquidity can make for jerkier price movements and can amplify market moves. The use of algorithmic trading has meanwhile added to the fears over flash crashes.

With Japan out for the National Foundation Day holiday on Monday, liquidity in Asian markets was markedly lower than usually. Indeed, a similar, holiday-inspired lack of liquidity was blamed for a spike by the Japanese yen against major rivals in early January. Currency market volumes are typically at their lowest in early Asian trading even under normal circumstances.

See: Here is the most volatile period in Asian currency trading

“Japanese markets were closed today — a likely factor in a mini ‘flash crash’ in the franc at the start of the Asian session — and there is an abundance of event risk over the course of this week,” said Scotiabank currency strategists Shaun Osborne and Eric Theoret.

The Swiss National Bank didn’t comment on the movement, while some analysts played down the significance of the move:

“The franc plunged briefly, but has since recovered all the losses — it was just a temporary move for less than half an hour. The more interesting question for me is Friday’s move lower in dollar-franc,” said Marshall Gittler, chief strategist at ACLS Global.

In Friday trading, the dollar slipped to a multiday-low versus its Swiss rival, as the franc enjoyed some trade-related tailwinds.

“My guess is that it was spurred by the news that the Swiss foreign minister was in Washington and talking with senior U.S. officials about a free-trade agreement with the U.S. That could boost Switzerland’s already enormous current account surplus, estimated for this year at 9.8% of GDP — the largest of any industrial country.”

On Monday, this was followed by Switzerland signing a trade deal with post-Brexit Britain. The U.K. is set to leave the European Union on March 29, though no deal governing its trade relations with the EU is in place yet. Besides a deal with Brussels, the U.K. also has to reach deals with all of its trade partners that it currently does business with via EU trade agreements.

Switzerland, for example, is not part of the EU, it is integrated in the European single market and a member of the European Free Trade Association.

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