Currency traders from Deutsche Bank AG (DBK) to HSBC Holdings Plc (HSBA), after enjoying a boom just a few months ago amid speculation the Federal Reserve was preparing to pare record stimulus, are again seeing their profits squeezed.
Daily trading on ICAP Plc’s EBS electronic platform tumbled to an average $77 billion in October, the least since before January 2006, according to the London-based broker. Deutsche Bank, the biggest currency trader, said Oct. 29 that a “flat” market was “negatively affecting FX revenues,” while HSBC said this week that revenue from foreign-exchange tumbled 10 percent in the third quarter from a year earlier.
As speculation built that the Fed will keep pumping $85 billion a month into the financial system through early 2014, volatility in the $5.3 trillion-a-day foreign-exchange market fell, making it harder for traders to profit from price swings. JPMorgan Chase & Co.’s Global FX Volatility Index dropped as much as 37 percent from a more than one-year high in June.
“We’ve had so many false dawns in a change in the monetary environment that you won’t see big moves until something actually happens,” Kit Juckes, a global strategist at Societe Generale SA (GLE) in London, said in a phone interview yesterday. “I’m looking forward to 2014 and thinking we’ll probably be stuck in the same range.”
The U.S. central bank won’t start reducing its bond purchases until March, according to the median estimate of 40 economists surveyed Oct. 17-18. Policy makers surprised investors who expected the Fed to announce a taper on Sept. 18 by saying that stimulus would continue for the time being. They reiterated that position last week. Fed Chairman Ben S. Bernanke first hinted back in June that the bank may dial back the program this year if the U.S. recovery takes hold.
JPMorgan’s volatility index fell last month to as low as 7.55 percent, from this year’s high of 11.96 percent in June. The next month, firms including Deutsche Bank said they enjoyed increases in revenue from currency trading.
While the gauge has rebounded about 8 percent from its low, prospects for further increases before year-end are slim, according to Maria Heiden, an investment adviser at Berenberg Asset Management.
“Our economists aren’t expecting any macroeconomic events and we’re not seeing any volatility showing up until next year,” Heiden, whose Hamburg-based firm oversees the equivalent of about $38 billion, said in a Nov. 5 phone interview.
The difficult trading environment has already claimed at least one victim. FX Concepts LLC, the firm founded by John Taylor that with $12 billion in assets in 2009 was the world’s largest currency hedge fund, said last month it was shutting its investment-management business.
Frankfurt-based Deutsche Bank, Germany’s biggest lender, said “unfavorable movements in global exchange rates” contributed to a 94 percent drop in earnings when reporting its third-quarter results last month. UBS AG (UBSN), the fourth-biggest currency trader, said the same day that foreign-exchange revenue declined, mainly in “the spot and options businesses.”
HSBC, Europe’s largest bank by value, said Nov. 4 that profits from currencies, which account for the biggest chunk of its global markets business, fell to $660 million last quarter, from $736 million a year earlier.
SocGen’s currencies, fixed income and commodities business was “resilient” in the face of an unfavorable market, with income from the assets dropping 24 percent in the third quarter from a year earlier, the French lender said today. Commerzbank AG said trading foreign exchange and credit products had been “markedly more difficult,” leading to a decline in revenues.
Shani Halstead, a London-based spokeswoman for HSBC, declined to comment. Sebastian Howell at Deutsche Bank in London had no immediate comment, while UBS’s Hana Dunn, also in London, wouldn’t elaborate on the bank’s recent earnings statement.
Smaller price swings can make foreign-exchange trading attractive for investors wanting to protect against declines in other assets, according to Axel Merk, who oversees about $450 million of currencies as the head of Palo Alto, California-based Merk Investments LLC.
“Currencies’ low volatility and low correlation may help buffer the portfolio when other asset classes tumble,” Merk wrote in an e-mailed report on Nov. 5. “Adding an actively managed currency component into a portfolio may help protect against downside risks.”
Volatility can wipe out profits of carry traders who make money by borrowing where interest rates are low to invest in higher-yielding assets elsewhere. Deutsche Bank’s G-10 FX Carry Basket index has climbed to 115.6 as of 9 a.m. in London, from a 14-month low of 110.5 on Aug. 27.
The slide in foreign-exchange trading coincides with investigations of at least seven banks, including Deutsche Bank, HSBC and Citigroup Inc. (C), for the potential manipulation of currency rates. The banks have said they’re cooperating with authorities. No one has been accused of wrongdoing.
At the same time, stricter regulations such as the European Union’s revised Markets in Financial Instruments Directive and the 2010 Dodd Frank Act in the U.S. threaten earnings.
The average daily volume on ICAP’s EBS platform has dropped almost 50 percent since February, when trading averaged $149 billion a day, the firm said in data released this week. The average across this year is $112 billion.
“There are some occasions as an active currency manager when you need to have the patience to just stand aside and see how things develop,” Thomas Kressin, the Munich-based head of European foreign-exchange at Pacific Investment Management Co., said in an Oct. 25 phone interview. “What we’ve been doing recently is keeping risk budgets tight, and not moving too far away from home.”