Strong start to autumn for most spot FX platforms

As autumn arrived, most spot FX platforms experienced an uptick in volumes, despite there being fewer trading days in September, compared to August. This is thanks to another month of turbulence in Italian politics, policy updates from the Federal Reserve and new US trade tariffs.

Amidst a busy trading month for financial markets, NEX reported a 2% increase in spot FX trading activity, with volumes increasing from $84.7 billion in July to $86.1 billion in September. However, on a year-on-year basis, volumes saw a significant 12% decline.

Thomson Reuters’ spot FX volumes grew 4.2% to $98 billion from August, but it too suffered a fall, dropping 4.8% when compared the same month in 2017.

Spot FX volumes on Fastmatch declined for the fourth month in a row, falling by 4% from $19.5 billion in July to $18.6 billion in September – its lowest figure of 2018. Year-on-year comparisons also show a decrease of 11.4%. Not good reading for a firm which has endured a period of difficulty following some very public staff changes.

However, it’s a cheerier story for Cboe FX, with spot volumes rising by 3.5% from August to $35.7 billion. Year-on-year growth was a healthy 8.1%.

But the biggest news continues to come from FXSpotStream, which reported an ADV of $31.9 billion, up 12.3% from August and up a huge 33% when compared to September 2017.

 

*All figures in US$

Insight

It was a strong start to Autumn for most spot FX platforms as they continued their recovery from the summer slump. They seemingly benefitted from a particularly busy news month, with plenty of column inches devoted to developments in the FX industry.

The main exception was Fastmatch. Its troubles continued as volumes dropped for the fourth month on the bounce. Euronext, which now owns 97.3% of the firm, and its founder and former CEO, Dmitri Galinov, continued their very public fallout in September. With a court case looming, it seems like headlines they could do without.

September also saw CLS’s long-serving CEO David Puth resign. A veteran of the FX industry, David played a key role in the development of the FX Global Code. Under his stewardship, CLS remained a safe pair of hands, with its core settlement service providing a unique level of safety and reassurance for trading 17 global currencies. We wish him all the best in his future endeavours.

Speaking of the FX Global Code, Edwin Schooling Latter, head of markets policy at the Financial Conduct Authority, said it is considering endorsing two voluntary codes: The Global FX Code and the UK Money Markets Code. This has put greater onus on senior managers to sign up. Expect a flurry of activity over the next few weeks.

Indeed, a report from NEX showed how its adoption has improved trading behaviour on EBS Direct, a relationship-based, disclosed platform, with a significant reduction in hold times, reject rates and a tightening of spreads.

All very positive, but it didn’t shed light on trading behaviour on its more popular, anonymous EBS Markets platform. Perhaps a second volume of the report is imminent?

Future predictions

It was reported in Bloomberg that Blackstone Group, the ownerof Thomson Reuters’ financial-and-risk arm, (also known as Refinitiv), is weighing a sale of FXall, a currency trading platform. According to people familiar with the matter it could fetch as much as $3bn.

Thomson Reuters has said it “remains a very strategic part” of its FX operations. Given the recent trend of exchange operators acquiring currency platforms to diversify their offerings, there is likely to be plenty of interest from potential buyers in the market.

Speaking of Refinitiv, confidential sources (OK, the FT…) also report that a rap song has been written by an employee to boost morale amongst staff.

In terms of currencies, the focus will be on the trade-weighted USD which continues to do well. Whether it can maintain this momentum is questionable, especially when investor attention eventually shifts to the bloating U.S. budget deficit and fading impact of the fiscal stimulus. The mid-term elections will also be in the back of their minds, with the outcome far from certain.

In Europe, the euro remains grounded by loose policy from the European Central Bank as well as a fair amount of political strife relating to Brexit and Italian politics. However, industry insiders believe it has the potential to bounce back over the coming year, particularly as investors start to expect an end to Fed tightening.

August FX activity boosted by EM sell-off

As the summer lull comes to a close, it has become apparent that there was no ‘sleepy summer’ for spot FX traders this year. Data from ECNs that publicly report their volumes has revealed that trading activity was largely up across the board in August.

NEX reported a 3% increase in spot FX trading activity as its volumes increased from $81.9 billion in July to $83 billion in August. Year-on-year volumes saw a slight increase of 2%.

Thomson Reuters’ spot FX volumes remained flat at $94 billion, but August’s trading activity represents a 14.7% increase when compared to the same period in 2017.

Cboe FX’s spot volumes rose by 3.9% from July to $34.5 billion. Year-on-year growth was an impressive 27.3%. The venue has now had 12 months during which ADV has been in excess of $30 billion per day.

Spot FX volumes on Fastmatch fell by around 2.5% from $20 billion in July to $19.5 billion in August. This follows a 9% decrease the previous month. However, year-on-year comparisons show an increase of 20%. Although it didn’t see an increase in ADV, its FX Tape saw a record amount of activity, averaging $83.6 billion a day in August.

FXSpotStream reported an ADV of $28.4 billion, up 2.5% from July and up a whopping 47.6% from August 2017.

CLS reported a 2.2% increase in August’s ADV to $425 billion. However, this is down 1.9% for the same period last year.

Spot FX*All figures in US$


Insight

After a very slow start to the summer trading season in July, data shows that most platforms experienced a slight recovery in spot FX volumes in August.

Despite the seasonal decline, trading activity in the market was stable, aided by volatility in emerging markets.

Once again, political events have played a major role in volatility. After the Turkish central bank lost its independence, the lira went into freefall.

The Argentinean peso was another currency in the crosshairs of currency traders. At the tail end of August, the central bank ratcheted up interest rates to a whopping 60%. Despite this drastic action, the currency continued to plunge 12%.

The Russian ruble experienced its worst month since April against the dollar, on the back of US announcements to introduce new sanctions against Russia

The decline in these currencies helped trigger a broader sell-off in the developing world’s markets, with JPMorgan’s emerging market currency gauge sliding 1% at one point to a new record low.


Future predictions

Industry insiders think that what happened in August is a sign of things to come over the next few months.

Political factors are continually weighing on currency movements. With prospective rate hikes from the US Federal Reserve coming into play before the end of the year and Trump’s Twitter account continuing to wreak havoc, many expect volatility to continue.

Some predict that the lack of stability and transparency in Turkey will drive more business away from the lira to ‘safe-haven’ currencies.

Closer to home, Brexit negotiations remain the topic of focus. There seems to be no end to near-term uncertainty; in fact, a Reuters poll predicts a no-deal Brexit could see GBP fall as much as 8%!

Global spot FX volumes cool off in July

Despite record-breaking temperatures across Europe and the US last month global spot FX volumes cooled off, with NEX, Thomson Reuters, Cboe FX, Fastmatch and FXSpotStream reporting decreases in average daily volumes (ADV).

NEX reported a 15% decrease in spot FX trading activity as its volumes dropped from $96 billion in June to $82 billion in July. This follows a 5% decrease in June from May. Year-on-year volumes remain the same.

Thomson Reuters’ spot FX volumes suffered a 14% decrease to $94 billion in July, its lowest recorded ADV of 2018. However, July’s ADV represents a 6.8% increase when compared the same period in 2017.

Cboe FX’s spot volumes encountered a 12% drop to $33 billion, compared with June’s $38 billion. Year-on-year painted a more positive picture for the platform with a 22% rise in spot FX volumes.

Spot FX volumes on Fastmatch fell by around 9% from $22 billion in June to $20 billion in July. This represents a steady 11% year-on-year when compared to July 2017.

FXSpotStream suffered the least this month, decreasing 8.7% from $30 billion in June to $28 billion in July. This represents a substantial 56% growth from the $18 billion recorded in July 2017.

CLS’s spot volumes also dropped 16.5% from June to $416 billion and were down 8% compared to the same period last year.

Global Spot FX

*All figures in US$

Insight

The summer lull weighed on spot FX volumes in July with major trading platforms all recording decreases of over 8.5%.

After a busy Q1 for trading platforms, firms are now returning to more regular levels of trading activity.

July saw the dollar rise against a basket of currencies due to continued fears over a trade war and expectations of US interest rate hikes.

The annual ‘summer slowdown’ means the results shouldn’t be interpreted as a worrying decline, but rather a seasonal break in trading activity.

On a more positive note, newly-released data shows FX trading volumes in London, the world’s largest currency hub, hit a new record in April. Over $2.72 trillion of trades were booked a day on average – beating the previous peak set in October 2014 – and is a strong vote of confidence in London as a global trading hub.

Looking beyond the UK, data from central banks in the USA, Japan, Singapore, Australia and Canada also paint a very positive global picture – suggesting trading activity is approaching close to USD 6 trillion a day. This would mark a new record for global trading activity.

Future predictions

So far in 2018, the FX market has reminded everyone of the difficulty in forecasting exchange rates as things can change abruptly and continuously.

All eyes are on the USA and China, which look set to continue their aggressive rhetoric as the trade dispute continues.

The Trump administration has threatened to slap more tariffs on Chinese goods. In response, the Chinese Government announced a list of possible tariffs ranging from 5% to 25% on $60 billion worth of U.S. agricultural, metal, and chemical products.

The trade war is fast becoming a currency war, with Trump accusing China and the EU of being ‘currency manipulators’ in an effort to gain an edge over the US by making their goods and services cheaper to buy in the US. Expect to see fluctuations in USD/CNY and EUR/USD over the coming weeks.

In Europe, the focus is on the Turkish lira. According to one analyst, buying the lira is like “catching a falling knife.” The currency has shed more than a quarter of its value against the dollar this year.

It will be interesting to see if the Central Bank of Turkey raises interest rates against the wishes of President Erdogan – an “enemy of higher interest rates” – in a bid to revive the lira’s value. Strategists at ABN AMRO believe it is unlikely that we’ll see any significant hike before Q4.

Spot FX volumes show impressive year-on-year growth

NEX reported a 5% decrease in spot FX trading activity as its volumes dropped from $101 billion in May to $96 billion in June. This follows a 21.7% increase in May from April. Year-on-year volumes are up a healthy 15.7%.

Thomson Reuters’ spot FX volumes have seen a small rise of 1.9% to $109 billion in June. It has experienced month on month growth since April when it recorded $95 billion, its lowest ADV since December 2017. June’s ADV represents a 17.2% increase when compared the same period in 2017.

Cboe FX’s spot volumes suffered the most in June, dropping 7.3% to $38 billion, compared with May’s $41 billion. Year-on-year painted a more positive picture for the platform with growth of 36% in spot FX volumes.

Spot FX volumes on Fastmatch fell by around 4% from $23 billion in May to $22 billion in June. This represents a 10% increase year on year.

FXSpotStream experienced the biggest increase this month, rising 7% from $28 billion in May to $30 billion in May. This represents a substantial 50% growth from the $20 billion recorded in June 2017.

Spot FX

Insight

So far this year, electronic trading platforms have seen strong performances in the spot FX market. June 2018 was no different with overall volumes across Thomson Reuters, FX SpotStream, Nex, Cboe FX and Fastmatch up 21% on June 2017.

Spot FX platforms have bounced back after a slow start to Q2. In April, all of the platforms recorded a decrease in trading activity, with the exception of Fastmatch.

Following large increases for all platforms in May 2018, we have seen a mixed picture of trading activity for the five spot FX platforms in June.

Key currency pairs came out of the wait-and-see mode they experienced in April. This is reportedly because volatility increased in May and June due to rising geopolitical tensions, concerns about trade wars and the prospect a global economic growth boom is nearing its peak.

A key focus over the past month or two was on the regulatory side with the Global Foreign Exchange Committee (GFXC) meeting taking place in South Africa on 27 June. At the meeting in Johannesburg, the GFXC appointed new Chair, Simon Potter, and Co-Vice Chairs, Adrian Boehler and Akira Hoshino.

It also revealed that more than 300 institutions have now signed up to the FX Global Code.

The GFXC has established a new group to deepen engagement with the buy-side, so all eyes will be on these institutions over the coming months.

Future predictions

The US-China trade war came to fruition with a first round of tariffs on $34 billion of Chinese imports on July 6, followed by a second round on $16 billion of imports.

The US’s trade partners including the EU, Canada and China are set to respond to latest U.S. trade barriers with retaliatory tariffs of their own. Starting in July, we could be getting dangerously close to a full-blown trade war.

Hopefully policymakers can put economics ahead of politics and come to a resolution to ensure unimpeded trade flows.

SEB chief EM strategist, Per Hammarlund, told FX Week that this trade spat could support the dollar in the short term, given the risk-off sentiment.

But, over the longer term, the event will undermine US growth, as well as its economic leadership, and weigh on EM currencies “for years”, Hammarlund says.

“Once countries lock themselves into a tit-for-tat battle, they will find it very difficult to get out of the spiral.” “If growth continues to slow, the EM FX sell-off will be prolonged, even if markets would see a temporary rebound if the US and China reach an agreement,” he says, adding that any interest rate hikes by the Federal Reserve will trigger a sell-off in EM currencies.

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