The publication of the Bank for International Settlements’ (BIS) Triennial FX Survey results revealed some fascinating findings.
As always, it continues to be the single most comprehensive, trusted and aggregated account of what has been going on in currency trading across venues, jurisdictions and a whole range of macro and micro criteria, and is keenly anticipated by the FX market.
So what did the report tell us?
The headline figure was that, as widely expected, average trading volumes fell slightly to USD5.1 trillion per day, down from USD5.3 trillion in 2013.
But this doesn’t tell the full story; the report found that the appreciation of the US dollar between 2013 and 2016 reduced the US dollar value of turnover in currencies other than the US dollar. This means that, when valued at constant exchange rates, turnover increased by about 4% between April 2016 and April 2013.
This a reality check for everyone with skin in the game. It tells us that the market has been reasonably resilient in the face of many challenges; the SNB revaluation, issues around conduct and low interest rates in major economies to name a few.
While spot transactions fell from USD2 trillion to USD1.7 trillion per day, the decline may have been driven by two main factors. Firstly, the unwillingness of major financial institutions to commit to risk taking activity, and a drop in market volatility. This means the alternative investment community and speculative traders, who are quite active in the spot market, are doing fewer transactions.
The geographical breakdown of trading is also interesting. When BIS last reported in 2013, London was the main FX trading centre by a comfortable margin, with more than 40% of all traded volumes, followed by New York. While London has continued to retain its crown three years on, activity has fallen by 5%, and New York’s share remains flat.
But Asia gained significant ground; Singapore (7.9%), Hong Kong SAR (6.7%) and Japan (6.1%) all increased their market share. The region continues to develop its currency markets and cross border trading continues to increase; it is a positive growth story for the FX market.
In terms of currencies, USD and EUR continue to remain unchallenged as the most actively traded, but the renminbi gained strong ground by moving into 8th place on the list. Emerging market currencies performed well overall, accounting for more than a fifth of trading.
Lastly, the banks have shored up their positions in the industry, in spite of the regulatory and conduct challenges the sector has faced.
Their position as the main FX trading posts was being challenged by a resurgent non-bank FX trading community, exemplified by the entry of XTX Markets in the top ten of Euromoney’s FX survey.
But trading has increased amongst the interdealer community, accounting for 42% of turnover in April 2016, compared with 39% in April 2013. Banks that are not reporting dealers accounted for a further 22% of turnover, while institutional investors were the third largest group of counterparties at 16%.
So overall, the global foreign exchange market continues to remain buoyant. It remains the largest and most liquid market in the world and a critical component of the global financial system.
As confidence in FX is restored through the global code of conduct and other initiatives, we will see a more liquid and stable marketplace emerge.