* Pound's sudden plunge in early Asia trade shakes markets
* Later rebounds from low but still down 2 pct on day
* Jitters over "hard Brexit" take toll on sterling
(adds HSBC forecast, quotes, details on algo trading)
By Anirban Nag
LONDON, Oct 7 Sterling lost a tenth of its value
in minutes on Friday, in what traders said was a "flash crash"
driven by computer-initiated sell orders that left the pound at
a fresh 31-year-low and heading for its worst week since January
The pound has been under pressure for most of this week as
anxiety grows that Britain will opt for a "hard" exit from the
European Union. On Friday, it dived about 10 percent from levels
around $1.2600 to $1.1378 in a matter of minutes in
thin early Asian trade.
That low was later revised to $1.1491 -- still the weakest
level for sterling since 1985 -- by Thomson Reuters, which owns
the Reuters foreign exchange brokerage platform RTSL and said an
outlying trade had been cancelled.
The drop in Asia came after French President Francois
Hollande said the EU needed to remain firm with Britain, after
it appeared Prime Minister Theresa May had opted for a tougher
exit from Europe. The hardline stance from both parties left
investors fretting about the pound's future.
"Of course, some in the market may see sterling's overnight
volatility to be the result of French President Hollande
demanding tough Brexit negotiations," said Hans Redeker, head of
currency strategy at Morgan Stanley. "The new British government
under May appears to have chosen an economic course which could
bear substantial risks."
Sterling recovered and was last fetching $1.2275,
still down 2.7 percent on the day. The euro also rose to 94.03
pence, its highest since early 2009, before easing
to 90.66 pence, up 2.5 percent. All of which saw the sterling
trade-weighted index down 1.6 percent at 74.7, its lowest
since January 2009.
Global markets have been on edge in recent days on worries
about how Britain will exit the EU and about May's comments on
loose monetary policy, which some saw as a thinly veiled attack
on the Bank of England.
Many investors think May's government is leaning towards a
hard Brexit, where Britain gives up full access to the single
market in order to impose full control on its borders. Some fear
that could hinder trade and constrict the foreign investment
needed to fund Britain's huge current account deficit, one of
the biggest in the developed world.
HSBC said on Friday it forecast the pound to drop to $1.10
and parity against the euro by the end of 2017.
"The pound used to be a relatively simple currency that used
to trade on cyclical events and data, but now it has become a
political and structural currency. This is a recipe for weakness
given (Britain's) twin (budget and current account) deficits,"
HSBC's global head of FX research David Bloom said.
MODERN VERSION OF SOROS
Sterling is set for a weekly loss of 5.4 percent, trading
below the psychological $1.25 mark and removing various
technical support levels on the move lower, spooking traders,
including computer-driven algorithms.
"Once the pound started moving lower, then more technical
algos could have followed suit, compounding the short, sharp,
selling pressure," said Kathleen Brooks, research director at
"Thus, the pound has been the victim of the digital,
headline-driven world that we live in. For sterling, algorithms
have become the modern-day version of a George Soros."
Billionaire Soros earned fame in 1992 by betting against the
pound, which was eventually forced out of the European Exchange
Rate Mechanism and sharply devalued on Black Wednesday.
Earlier this year, the South African rand suffered a similar
plunge and analysts said the sharp drop in sterling will do
nothing for confidence in a market that has seen volumes drop as
tougher regulations for banks, traditionally the dominant
force, bite and curtail trading by humans.
"The greater share of the market that automated algorithmic
trading takes in a less reliably liquid market, the greater the
risk of these types of moves going forward," said Derek
Halpenny, head of research at Bank of Tokyo Mitsubishi.
The weakness in the British pound helped support the dollar
before U.S. jobs data later on Friday. The dollar index
was up 0.3 percent at 97.093, its highest since late July.
The employment report is expected to show U.S. nonfarm
payrolls rose by 175,000 jobs in the month, according to the
median estimate of 100 economists polled by Reuters. A strong
report would increase bets that the U.S. central bank is gearing
up to raise interest rates in December.
(Additional reporting by Masayuki Kitano in Singapore; Editing
by Catherine Evans)