Embattled Currency Market Proves Resilient to Global Threats

Currency Market Averages $5.1 Trillion Daily Volume
  • Daily volume drops 5% from 2013 in BIS triennial survey
  • Spot trading falls for first time since 2001; swaps use rises

The strength of the global foreign-exchange market surprised many when the Bank for International Settlements published its latest triennial survey on the industry.

Given the range of threats facing the market, the drop in average daily trading to $5.1 trillion in April, from a revised $5.4 trillion three years earlier, was smaller than CLS Group Holdings AG and Capital Economics Ltd. anticipated. If it hadn’t been for the dollar’s appreciation, the volume would actually have risen about 4 percent, according to the report Thursday from the BIS, known as the central bank’s central bank.

The world’s largest financial market has been blighted by tumbling profits, layoffs and closures, a rate-fixing scandal that’s led to more than $10 billion in penalties and a swath of regulations designed to avoid another financial crisis. Foreign-exchange trading has adapted: the use of swaps widened its lead over spot deals in the latest BIS figures, while emerging-market currencies took a bigger slice of the market.

“The headline number is better than I expected and better than the market had anticipated,” said David Puth, New York-based chief executive officer of CLS, which settles trillions of dollars of currency transactions each day. Puth is leading dozens of senior market players to try and hammer out a global code of conduct for foreign exchange. “The market has continued to evolve and develop.”

The dollar increased its lead as the most-traded currency in the survey, and was on one side of 88 percent of deals, up a percentage point from three years earlier. The euro remained at No. 2, though its share fell to 31 percent.

The big winner was the yuan, which doubled its slice of the market to 4 percent. That made it the eighth most-traded currency worldwide and saw it overtake the Mexican peso to be first in emerging markets -- vindicating China’s efforts to liberalize its use.

Spot currency trading fell 19 percent to $1.7 trillion a day, its first decline since 2001. The use of swaps, which allow an investor to borrow one currency from a counterparty while simultaneously lending a second currency to another, climbed 6 percent to $2.4 trillion. The two biggest parts of the market “have evolved in opposite directions,” the BIS said.

“It shows how liquidity in the foreign-exchange market remains much better than in other asset classes,” said Mark Dowding, a partner at BlueBay Asset Management LLP in London, which oversees about $60 billion. “With more investors chasing yields in overseas markets, the need to manage currency risk is more important than ever.”

The smooth running of the currency market matters to everyone from central banks to companies right across the global economy. Dealers have had a tumultuous time since the BIS’s 2013 survey, which showed a jump in daily trades from $4 trillion in 2010.

Falling Profits

The Parker Global Index of top currency funds’ returns has fallen in two of the past three years and is headed for another decline in 2016. Losses were worsened by unforeseen events such as the Swiss National Bank’s shock decision to scrap its exchange-rate cap last year, the Bank of Japan adopting negative interest rates in January and a slower pace of U.S. policy tightening than the Federal Reserve had predicted.

The Swiss franc was another currency to lose market share in the BIS report, while the pound saw trading increase in April, two months before the Brexit vote. The five top trading locations extended their lead over smaller venues. The five largest trading locations extended their lead over smaller venues, though the top-placed U.K.’s share of the market fell to 37 percent from 41 percent.

Institutional investors such as insurance companies and pension funds further increased their activity in contrast to hedge funds and proprietary trading companies, with their greater market share spurred by more use of swaps, the Basel, Switzerland-based BIS said.

“The fact that trading dipped only slightly is noteworthy given the lack of volatility in foreign-exchange markets more recently, and the continued sluggishness of economic activity,” said Julian Jessop, chief global economist at Capital Economics in London. “Turnover was unusually high in April 2013 -- it was therefore always unlikely that FX trading would increase.”

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