Currency Trading Rises From Tokyo to New York on Policy Jolts

Updated on
  • U.K. volume boosted by 27% increase in dollar-yen trading
  • New York turnover climbed 10% in the six months through April

Currency trading rose in the six months through April across major global centers, from Tokyo to London to New York, as investors grappled with monetary-policy whiplash, surveys from central banks showed.

In the U.K., the world’s largest foreign-exchange market, average daily volume rose 5 percent from October to $2.21 trillion, led by a 27 percent jump in dollar-yen transactions, according to the Bank of England’s Foreign Exchange Joint Standing Committee. The volume dropped 9 percent from April 2015. North America’s average daily volume rose to $893 billion from $809 billion in October, the Federal Reserve said. In Japan and Australia, total turnover, which includes spot, forwards, options and swaps, rose 5.1 and 6 percent, respectively. 

Decisions from the Bank of Japan and the Fed that caught traders leaning the wrong way may have contributed to the increase, analysts said. Fewer Fed officials expect the central bank to raise interest rates more than once this year, policy makers’ projections showed last month.

“It’s all about monetary policy,” Ned Rumpeltin, European head of currency strategy at Toronto Dominion Bank in London, said in an e-mail. “We saw a considerable degree of expectation build that the BOJ would deliver another round of easing at its policy meeting in April. When these hopes were dashed, any outstanding dollar-yen long positions came under considerable pressure.”

Yen Shift

Trading in the yen also surged because the currency had been cheap relative to its peers, said Andres Jaime, a foreign-exchange and rates strategist at Barclays Plc in New York.

Japan’s currency strengthened from almost 122 per dollar in January to below 107 in April. Yet, based on a metric of purchasing-price parity, it’s still undervalued against the dollar. The currency appreciated below 100 per dollar in June, fueled in part by haven demand spurred by the U.K. vote to leave the European Union. The yen strengthened 0.1 percent to 105.73 per dollar as of 8:06 a.m. in Tokyo Tuesday.

The Bloomberg Dollar Spot Index, which tracks the U.S. currency against 10 major peers, was little changed after climbing 0.1 percent on Monday.

“Economic policy uncertainty has continued fueling yen demand, since its significant undervaluation, the abatement of the forces that led to that undervaluation and yen correlations make it one of the best hedges out there,” Jaime said in an e-mail.

In Singapore, turnover averaged $419 billion in April, a 36 percent increase from six months before, the nation’s Foreign Exchange Market Committee said in a statement.

Daily average turnover of currency forwards jumped 28 percent to $61.8 billion in April in Japan and 19 percent in Australia, the data showed.

Price Swings 

The surge in dollar-yen trading and currency forwards exposure coincided with an increase in price swings. Volatility among Group-of-Seven currencies rose to an average of 10.35 percent in the six months through April, compared with 9.85 percent in the prior six months, JPMorgan Chase & Co. index data show.

Japanese exporters may have increased use of currency forwards amid volatility, analysts said. Insurers including Nippon Life Insurance Co. and Dai-ichi Life Insurance Co. buy overseas bonds using currency hedges.

While turnover in London rose from the previous six months, it fell 9 percent from a year earlier. Barclays’s Jaime said banks paring risk-taking activities may be one of the reasons behind the decline.

“The secular trend for declining trading volume is a matter of tighter regulation and increased capital requirements,” he said.

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