Currency Liquidity Vanishes on Mounting Fears of London Hub Slamming Shut

(Bloomberg) -- Liquidity evaporated in the $6.6 trillion-a-day currency market as few traders wanted to take positions against a surging dollar ahead of a potential lockdown in the biggest trading hub for foreign exchange.

The pound on Wednesday sank as much as 5% to its lowest since 1985 and Norway’s krone plummeted more than 13% to a record low, moves akin to so-called flash crashes. A gauge of the dollar hit a record high as the U.S. currency outstripped all of its Group-of-10 peers Wednesday. With U.K. Prime Minister Boris Johnson increasing restrictions on the population and not ruling out tighter controls on financial center London, market makers are disappearing and moves appear to be spinning out of control.

“There is probably some degree of panic setting in among local investors that things are ‘really real’ now,” said London-based Ned Rumpeltin, the European head of currency strategy at Toronto-Dominion Bank. “At a minimum, we think there is a strong impulse to liquidate what you can -- before you can’t -- as London’s trading floors are probably about to be slammed shut before too long.”

There has been growing angst that the U.K. government is “behind the curve” in the race to tackle the coronavirus, he said. Johnson announced Wednesday that schools will close, yet other European nations have already undertaken unprecedented curfew measures to combat its spread.

Further measures intended to stop the virus spreading quickly across Britain could include restricting the movement of people in London, though such steps are not likely before Friday at the earliest, according to one official familiar with the matter.

So far in the U.K., schools, bars and shops have stayed open and commuters are still using trains on the London underground. The U.K. saw $2.88 trillion changing hands per day in the currency market as of October.

The currency moves come amid global concerns about dollar funding markets that have prompted policy action from the Federal Reserve and the U.S. government. Measures of funding stress have soared at various points this week in the worldwide dash for dollars, while moves in fixed-income markets and equities have been tectonic.

The market is still “in dire need” of dollars globally and “the more we deleverage the financial system the worse it gets,” said Brad Bechtel, the New York-based head of global currency trading at Jefferies.

FX Intervention

Dollar strength has also revived whispers that the U.S. may consider intervening to weaken its currency, which also poses a major challenge for governments facing higher costs on their dollar debt.

“The biggest fans of FX intervention will be the White House,” Chris Turner, strategist at ING Groep NV, wrote in a note to clients Wednesday. “With the trade-weighted dollar now going to an all-time high, maybe the U.S. Treasury does want to press the button.”

If such a move is undertaken, the U.S. is likely to sell dollars against the euro and yen, he said.

In London, meanwhile, any prolonged outage in the city -- located at the center of the global trading day and bridging business hours in Asia and New York -- would be unprecedented in the era of modern electronic dealing. The British capital also plays a major role for commodities and hosts Europe’s dominant stock market.

“A London lockdown would take liquidity out of everything. And everything is already down,” said Stephen Gallo, European head of FX strategy at the Bank of Montreal. “Everyone wants cash, all they want is cash. Liquidity is horrible on everything. Liquidation is feeding on itself, causing more illiquidity. This is a sudden stop.”

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