Photographer: Michael Nagle/Bloomberg

World's Biggest Market Shrinks at Least 20% as Profits Slide

  • Currency trading falls in U.K., North American markets
  • Figures shown in central banks' snapshot survey for October

The world’s biggest financial market just got a whole lot smaller.

Currency trading in the U.K. and North America shrank by more than 20 percent in October from a year earlier, according to central banks in those regions.

North America’s average daily volume fell 26 percent from the previous October to $809 billion, the Federal Reserve-sponsored Foreign Exchange Committee said in a statement on its website Monday. Turnover in the U.K., the biggest center for foreign-exchange dealing, dropped to an average $2.15 trillion, 13 percent lower than in April and down 21 percent from a year earlier, the Bank of England said. That was its lowest daily level since 2012.

The declines coincide with currency managers losing money last year, according to a Parker Global Strategies LLC index tracking top funds in the industry. A measure of currency volatility fell below its five-year average in October, diminishing the price swings that traders exploit for profit, while investors were still struggling to come to terms with China’s surprise devaluation of the yuan in August.

“The declines are bigger than I would have thought,” said Neil Staines, head of trading at ECU Group Plc, a London-based money manager specializing in foreign exchange. “However, the one dominant theme throughout this period was uncertainty. There were some significant pullbacks in popular emerging-market trades.”

Policy Divergence

October was also a significant month for monetary policy. The Fed and European Central Bank gave signals for a more divergent approach, with U.S. officials laying the groundwork for their interest-rate increase in December. ECB President Mario Draghi said Oct. 22 that euro-zone policy makers were assessing whether more stimulus was needed. Two months later, it was delivered.

The figures, published in a series of coordinated snapshot surveys, show that as the biggest foreign-exchange centers shrink, Asia is on the rise.

Average daily trading in Japan rose 5.6 percent to $383.1 billion in October compared with April, according to the Tokyo Foreign Exchange Market Committee. The Bank of Japan declined to step up its monetary stimulus at the end of October even as it postponed its time-frame for reaching an inflation target.

In Singapore, turnover averaged $401 billion a day in October, up 5 percent from six months before. The Reserve Bank of Australia said volumes in its nation rose 4 percent from April to $136.2 billion. That’s down from $150.3 billion a year earlier.

Rising volatility from tumbling commodity and stock markets has seen investors prepare for less policy tightening from the Fed and more easing from both the ECB and BOJ. It remains to be seen whether this increased turmoil will also lead to a boost in currency trading.

Parker Global’s returns gauge has climbed 0.3 percent since the start of 2016, and JPMorgan Chase & Co.’s Global FX Volatility Index rose to 10.6 percent. That’s up from as low as 9.45 percent on Oct. 22, below the average of 9.52 percent over the past five years.

--With assistance from Rachel Evans in New York.

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