May 19 (Bloomberg) -- Asian currency trading is recovering in the second quarter as global fund managers pump money into the region’s stocks and bonds, Citigroup Inc. said.

Citigroup’s Asia-Pacific foreign-exchange volume may rise about 10 percent from the first quarter, according to a May 18 statement from the bank in response to e-mailed questions. A new electronic trading system for financial institutions, Citi FXVelocity, has transactions of $2.25 billion a day in the region, the bank said.

“Volumes continue to underpin Asian currency trading profitability,” Rodrigo Zorrilla, co-head of markets for Asia Pacific in Singapore, said in a May 14 interview. “In the longer term, the relative growth story of Asia to the rest of the world will hold up asset prices better and also improve intra-regional trade.”

The MSCI Asia Pacific Index of regional stocks climbed 22 percent this quarter as investors returned to Asia after the collapse of Lehman Brothers Holdings Inc. last year prompted them to hoard U.S. dollars and plow money into Treasuries. Currency markets are stabilizing after volumes faded during the global credit crisis, the Asian Development Bank said in an April 21 report.

Funds investing in emerging markets attracted $14.2 billion of cash in the year to May 6, as developed countries saw net outflows of $58.2 billion, Cambridge, Massachusetts-based research firm EPFR Global said on May 8. Developing Asian economies will grow 4.8 percent in 2009, even as the world economy contracts 1.3 percent, the International Monetary Fund forecast on April 22.

Sitting on Cash

Fund managers are still “sitting on lots and lots of cash” so the pickup in volumes will continue, said Zorrilla at New York-based Citigroup, the fifth-biggest foreign-exchange trader. Currency movements are stabilizing, he said.

The difference between what traders pay to buy the won against the dollar and what they sell it for has narrowed as a measure of volatility declined, according to data compiled by Bloomberg. The so-called bid-ask spread widened to an average 1.1397 won per dollar in the last two quarters, after Lehman’s bankruptcy, from 0.5173 in the first nine months of 2008. It’s shrunk to 0.8986 this quarter.

Volatility on one-month won-dollar options fell to 24.5 on May 18, from as high as 80 on Oct. 28, according to data compiled by Bloomberg. Traders use the gauge of expected swings in exchange rates when pricing options.

The won gained 9 percent this quarter to 1,243.25 per dollar, after slumping 34 percent in the previous six quarters.

‘Green Shoots’

“The bulk of the foreign-exchange revenue will come from the flow volumes, not volatility,” said Nadir Mahmud, Asia head of currency, local markets, trading and risk treasury at Citigroup. “Green shoots and a return of risk appetite brought people back to the markets over the past couple of months.”

Mahmud said that his bank’s business with investment managers and hedge funds is almost back to the first quarter of last year, helping to make up for slumping transactions with exporters. Overseas sales by companies in Taiwan fell 34 percent in April from a year earlier, while shipments from Singapore sank 19 percent, according to government data.

The bank may give some indication of currency volumes in its quarterly earnings report. Citigroup’s Securities and Banking revenue for Asia Pacific, which includes currency and fixed-income trading, rose 6 percent in the first quarter from a year earlier to $1.06 billion, according to a May 15 e-mail from the bank. It doesn’t break the figures down by asset-type.

To contact the reporter on this story: Patricia Lui in Singapore at Plui4@bloomberg.net

Last Updated: May 18, 2009 22:15 EDT