Politics Drives Record Pound Trading as London Boosts Hub Status

  • Sterling-dollar turnover climbs 5 percent to $296 billion
  • U.K., U.S., Australia FX volumes rise; Japan, Singapore fall

When it comes to stoking currency trading, nothing beats politics.

Trading volumes in sterling versus the dollar surged to a record in April, according to a biannual survey of the Bank of England’s foreign-exchange committee, as U.K. Prime Minister Theresa May called a snap election. The currency activity also shows that the world’s leading hub hasn’t yet seen any repercussions from last year’s Brexit vote.

The overall volume of all the currencies traded in the U.K., U.S. and Australia rose, too. In Britain, May’s call for a snap election was initially interpreted as a positive sign as it was expected to result in a stable government. That saw sterling jump by the most in three months and markets trim short positions. On the other side of the Atlantic, the dollar’s decline accelerated on growing doubts that newly elected President Donald Trump would be able to push through the fiscal stimulus he had promised.

“You’ve got a perfect storm somewhat for volumes in cable because the market was massively bullish the dollar and simultaneously massively bearish the pound, and you’ve got this game-changing shift for both currencies,” said Neil Jones, the head of hedge fund sales at Mizuho Bank Ltd., in London. The U.K. election call spurred a “huge reduction in short-sterling positions, so obviously that would boost volume quite dramatically,” he said.

Leading Hub

On average, $296 billion worth of the pound-dollar pair changed hands in April, 5 percent higher from October and eclipsing the previous high set three years ago.

The total volume of currencies traded out of the U.K. surged 12 percent to $2.44 trillion a day, with much of the increase stemming from a 14 percent jump in FX swaps. Average daily volumes in North America climbed 0.9 percent to $889.5 billion, according to data from the Federal Reserve Bank of New York. The data include over-the-counter transactions in spot, forward, swaps and options markets.

“It was steady as she goes in the U.S. OTC FX markets, and not able to generate as much advantage from increased volatility in European currencies,” according to Javier Paz, a senior analyst at consultancy Aite Group. “The U.K. OTC market, however, benefited from pound- and euro-related volatility and this is seen in the spot FX market – an area that has long been sleepy and hurting FX platforms that specialize in that FX product.”

Similar surveys showed volumes in Japan and Singapore slip, while those in Australia inched higher.

For now, London’s status as the world’s leading foreign-exchange hub isn’t under threat, according to Mizuho.

“The world still sees London as the global hub of FX trading, Brexit or no Brexit,” Jones said. Against the backdrop of London’s ideal location in terms of time zones and flexible labor market, Jones added that a “strong element is the structural inertia” to relocating elsewhere.

“It is not easy to relocate,” he said. “We don’t know on the pendulum how hard or soft Brexit will be.”

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