Geopolitics Drives Record 2019 FX Volumes for SGX

SGX saw record volumes in its FX futures during 2019, which it credits to heightened trading activity due to geopolitical factors.

The exchange is reporting aggregate FX volumes of $1.3 trillion for 2019, up 44% from $914 billion in 2018, with a total of 23.5 million futures contracts traded on its platform last year, a 28% increase from 2018.

SGX’s USD/CNH futures were a big driver of this growth, with an average daily volume (ADV) of $3.67 billion being traded, up 69% from $2.17 billion in 2018. Daily trading volumes on these futures exceeded $4 billion on 64 days last year compared to just eight days in 2018.

One key factor that has contributed to this increase in USD/CNH futures trading, says SGX, is the ongoing trade war between the US and China.

“Given its sizeable international trade relationships, China’s rising economic and political clout has made it a strategic competitor to the US. As a result, global markets have focused on the outcome of the trade war between the countries throughout 2019 as the long-running feud continues to bring significant disruptive implications,” says SGX in a release issued today.

The US and China spent the first half of last year locked in a trade dispute and, when no real progress was made on the negotiations, additional tariffs on China were introduced in August. In response, China placed a stop to agriculture imports from the US and was subsequently labelled as a currency manipulator.

“Renminbi volatility shot up as the currency breached the closely watched level of seven against the US dollar,” says SGX, and this volatility in turn helped drive trading volumes in the exchange’s USD/CNH contract.

With economic indicators pointing towards a decline in exports, the People’s Bank of China (PBoC) decided to lend support with an interest rate cut, while the US government then blacklisted several Chinese technology companies over investor protection requirements.

Although the year ended on a less contentious note, with a “Phase One” trade deal apparently negotiated, SGX notes that details of a full trade remain elusive heading into 2020. That said, the US Treasury recently removed China from its list of currency manipulators.

“The US-China trade relationship is front and centre of EM risk and will be a key determinant of renminbi trading. In 2019, SGX USD/CNH futures broke multiple record highs as market participants sought an effective tool to manage their risk. With rising volatility in early August (and subsequently subsiding with the renminbi bound to a narrow range), daily trading crossed US$10 billion on 5 August for the first time. Over the second half of 2019, total transactions in SGX USD/CNH Futures reached US$481 billion another record as the trading interest remained closely tied to the trade talks,” says the exchange in the release.

Meanwhile, the total trading volume for SGX’s INR/USD futures in 2019 climbed to $395 billion, representing about 5.7% year-on-year growth. A total of 13.93 million of these contracts were traded last year, up 8.7% compared to 2018.

The rupee appreciated in the first half of 2019, buoyed by the outcome of the general elections and supported by sustained foreign portfolio investor (FPI) flows before weakening by 2% for the year. Volatility in the rupee drifted lower throughout 2019 as the Indian real estate sector dragged down the economy, hurting both banks and non-bank financial services firms.

“Trading in SGX INR/USD futures reflected the activity in the underlying rupee market. For most of 2019, rupee volatility remained low and was observed in the futures market. Whenever volatility rose, as seen in the sharp gain in March or the steep drop in August, trading activity corresponded. Broader EM weakness induced by a stronger US dollar contributed to the rupee declining by almost 10 paisa on 18 December. SGX INR/USD Futures trading kicked into higher gear, with volume surging past 146,000 contracts on the day to set a new record for single-day trading of over US$4.1 billion,” says SGX.

Elsewhere in SGX’s FX suite of products, KRW/USD futures volumes more than doubled in 2019 with $9.16 billion traded over the course of the year.

The exchange attributes this spike in trading activity to several factors.

Firstly, the talks between US president Donald Trump and North Korea’s leader Kim Jong-Un brokedown, which was clearly a setback from bringing lasting peace to the Korean Peninsula. Secondly, concerns over the technology sector lingered, with the White House placing restrictions on US tech giants from supplying to Chinese companies as well as considered limiting access to American markets for Chinese companies through listings and/or M&As. All of this had an impact on Korean technology firm’s supply chains.

In addition, the slowdown of the global economy and a correlation with the renminbi weakened the won past the 1,200 level during the year before it staging a minor recovery. To keep the economic slowdown at bay, the Korean central bank also cut key rates several times.

“These risks and the ensuing market volatility spurred trading in SGX KRW/USD futures. Trading activity grew by almost two times on a y-o-y notional basis, with volume at $9.16 billion in 2019. Based on contracts traded, volume tripled with 428,903 contracts changing hands,” says SGX.

Galen Stops

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