WEBVTT - SocGen's Juckes on Brexit Flash Crash: Lack of Liquidity(Audio)

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<v Speaker 1>You're listening to Taking Stock with Kathleen Hayes and Pim

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<v Speaker 1>Fox on Bloomberg Radio. A tough week for the pound,

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<v Speaker 1>A tough night for the pound. The British pound was

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<v Speaker 1>already under great pressure this past week, uh sparked by

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<v Speaker 1>Prime Minister Theresa's May, Theresa May's timetable for Britain's withdrawal

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<v Speaker 1>from the European Union and concerns it might prove to

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<v Speaker 1>be a hard Brexit. But then something happened. Just shortly

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<v Speaker 1>after seven o'clock Eastern The pound dropped about six percent

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<v Speaker 1>in two minutes, sparking Bank of England Governor Mark Harney

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<v Speaker 1>to ask the Bank for International seven months to look

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<v Speaker 1>and see what happened. Joining US now is Kit Jooks.

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<v Speaker 1>He joins US from London, where he's global head of

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<v Speaker 1>Foreign Exchange Strategy at Society General. So Kit, I was

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<v Speaker 1>sitting I was sitting here on the on the Bloomberg

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<v Speaker 1>News set taking part in Dabria Asia for Bloomberg Radio

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<v Speaker 1>and Television, and Sherry On from our Hong Kong office

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<v Speaker 1>came out and almost at the very top of a

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<v Speaker 1>report said the pound, it's down. It was crazy move.

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<v Speaker 1>What happened? Well, you know, I was. I was definitely

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<v Speaker 1>fast asleep. It's that's that's that's just after midnight our time,

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<v Speaker 1>so no chance of my being awake with a seven

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<v Speaker 1>am morning meeting here. But the I don't know. You know,

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<v Speaker 1>that time of day is when financial market liquidity it's

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<v Speaker 1>thin or odd because THEO has just come in, so

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<v Speaker 1>people have things to do. But there's not necessarily a

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<v Speaker 1>lot of natural liquidity of people who want to say

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<v Speaker 1>I'll take the other side. So if someone wants to

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<v Speaker 1>sell a currency or anything, um, you know, the market

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<v Speaker 1>needs someone to come on the other side and said, yeah,

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<v Speaker 1>that looks cheap, I'll buy that lower down and um.

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<v Speaker 1>In this instance, whether someone put in a cell order

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<v Speaker 1>at the wrong price, whether there was some some you know,

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<v Speaker 1>whether a computer program did something to sell something at

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<v Speaker 1>the wrong price too low or too much, or whether

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<v Speaker 1>just just the weight generally of people being concerned about

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<v Speaker 1>the UK use all week and by Friday morning there

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<v Speaker 1>just wasn't any what you prepared to bid for something

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<v Speaker 1>that someone settling, so the price tumble stumble stumbles, and

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<v Speaker 1>then everybody goes, Okay, I'll make you have a coffee.

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<v Speaker 1>I'm not going to join this game and it gets

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<v Speaker 1>out of control. But they'll they'll they'll look through it.

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<v Speaker 1>But I'm you know, we'll call it that. We'll call

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<v Speaker 1>it a fat finger or a flash crash. Um. But

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<v Speaker 1>they're always the way around that the market was going

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<v Speaker 1>before we started that. That's a feature of these flash crashes.

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<v Speaker 1>Kit chukes am I to believe that the central banks

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<v Speaker 1>around the world, let's just leave the Federal Reserve out

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<v Speaker 1>of this for a moment, are trying to devalue the

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<v Speaker 1>currencies of their respective regions in order to promote economic growth.

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<v Speaker 1>I don't think anyone's trying to devalue their currencies very

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<v Speaker 1>much at the moment. They're trying very hard to make

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<v Speaker 1>their currencies not go up. Marginally different kind of spin

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<v Speaker 1>on that for you. But at this point in time,

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<v Speaker 1>you know, the European Central Bank doesn't want the euro

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<v Speaker 1>to strengthen it having weakened the I noted that the

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<v Speaker 1>authorities in Brazil said they thought it was about time

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<v Speaker 1>the FED raised interest. It's as then, we really don't

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<v Speaker 1>want our currency, which is the strongest currency in the

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<v Speaker 1>last week in the world, to go up any further.

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<v Speaker 1>Thanks so trying to get their currencies to weaken, you know,

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<v Speaker 1>trying to prevent or hoping or wishing they wouldn't get

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<v Speaker 1>any stronger. The reason I put it in that in

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<v Speaker 1>that context is I'm wondering whether you can make a

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<v Speaker 1>case for the British electorate having done the work of

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<v Speaker 1>a central bank by working to devalue the currency and

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<v Speaker 1>also helped to stimulate exports and investment in the United Kingdom.

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<v Speaker 1>Definitely look you in I'm sure that somewhere in my

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<v Speaker 1>undergraduate years, more years ago than I care to think about,

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<v Speaker 1>you have looked at the situation and said, if you

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<v Speaker 1>had a negative terms of trade shock, which the UK

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<v Speaker 1>has decided to vote for in the UK government has

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<v Speaker 1>has decided to make happen, you will naturally need fall

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<v Speaker 1>in your exchange rate to reach new equilibrium. I'm sure

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<v Speaker 1>I can see a picture of that in a textbook

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<v Speaker 1>in my mind, and we're trying to make that textbook

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<v Speaker 1>work right now, and we're all pulling the same way.

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<v Speaker 1>So a week of pound is a necessary outcome of

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<v Speaker 1>the terms of trade shock, which is what to me

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<v Speaker 1>is what happens if you stick a spanner in the

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<v Speaker 1>spokes of the of the wheel of your global trade

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<v Speaker 1>partners ruin your significantly damage your biggest trade relationship, and

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<v Speaker 1>sit there hoping you can stay on the bicycle without

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<v Speaker 1>falling flat in your face. Now, Um, the dollar rally,

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<v Speaker 1>and of course that means other currencies are weakening. Uh,

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<v Speaker 1>seems even more in place since this job support came

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<v Speaker 1>in strong enough to solidify this view of a December

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<v Speaker 1>rene hike. But we just had a guest, Uh, Tom

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<v Speaker 1>Gimball from La Saul. It's an executive type hiring search firm,

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<v Speaker 1>um say, echoed by Ethan Harris, a Bank of America Marylynn.

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<v Speaker 1>She's been on an eighteen day trip around the world

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<v Speaker 1>that for domestically and for a lot of people overseas.

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<v Speaker 1>Now it isn't so much the Fed they're watching in

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<v Speaker 1>the next few weeks. It's the outcome of the election.

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<v Speaker 1>And the idea seems to be if Donald Trump gets elected,

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<v Speaker 1>look out because it's a huge uncertainty what would that

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<v Speaker 1>mean for the dollar? Back to front for the dollar

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<v Speaker 1>because you're the world's biggest reserve currency. If if if

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<v Speaker 1>uncertainty about the economic outlook in the wake of the

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<v Speaker 1>of the presidential election results in investors being skittish, scared

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<v Speaker 1>risk averse. They'll sell those Brazilian rayale, they'll sell Asian counties,

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<v Speaker 1>they'll move out of all the assets that they've been

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<v Speaker 1>buying that had higher yields, and they'll revert to the

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<v Speaker 1>safest thing they know, which is something at the front

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<v Speaker 1>end of the US Treasury curve that that's cash or

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<v Speaker 1>cash like, and the dollar will go up, not down.

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<v Speaker 1>And that's the feature of the US dollar. So um,

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<v Speaker 1>I would I would bet that the Donald Trump presidency

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<v Speaker 1>is um is good for the dollar against the whole

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<v Speaker 1>load of the world's biggest country, is bad for the

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<v Speaker 1>Canadian dollar and the Mexican pay so which between them,

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<v Speaker 1>nearly a quarter of the trade had waited the index

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<v Speaker 1>of the US or nearly a quarter of US trade

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<v Speaker 1>goes up north or south. Thanks very much. Kit Juke's

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<v Speaker 1>global head of Foreign Exchange Strategy for Associate General, joining

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<v Speaker 1>US from London. This is Bloomberg