What does this mean for the markets?
Typically, when a large Trading Center enjoys an extended holiday period, markets are exposed to one of two outcomes:
- Quiet flow and low volatility, as participants decide to stay on the sidelines
- A spike in volatility due to the lack of liquidity in markets and the potential influence of automated trading strategies
Although Financial Markets have recently recovered¸ they were under significant stress a couple of months ago and activity indicators have been disappointing across the world since then, particularly across Europe and China.
Only a couple of weeks ago, we saw what can happen during an extended holiday period. As Japan was enjoying consecutive public holidays, the AUD/JPY moved more than 4% in a matter of minutes on what the media labeled as a currency “flash crash”, crediting algorithms and illiquidity for the sharp moves.
This has been further amplified by events brewing in the background: Brexit; China/US tensions; the US government shutdown; and Trump’s investigation.
Central Banks are taking action and the People’s Bank of China is cutting the reserve requirement ratio by 0.5% on January 25 (and previously on Jan. 15), on a move to offset liquidity fluctuations during the Chinese Lunar New Year holiday season, which normally sees higher demand for cash.