Interest Rate Risk Helps Steady FX Volumes

Although spot FX markets have been characterised as existing in a very low volatility and volume environment, the same cannot be said for the interest rate space, and that has enabled FX volumes to remain steady over the past year according to data from six regional FX committees.

The FX committees of the UK, US, Singapore, Tokyo, Australia and Canada have released the results of their semi-annual FX volume surveys, the Hong Kong committee has not published as at time of going to press, and collectively they report average daily turnover (ADV) of $4,897.5 trillion in April 2019, a fraction higher than April 2018’s $4,883.1 trillion. That volumes have remained steady is entirely down to increased activity beyond spot, with outright forwards, NDFs, FX swaps and FX options all showing an increase on a year-on-year basis. Spot FX volumes have fallen over the same period by 6.5% to $1,367.3 trillion. Aggregating the reports, outright FX ADV was $621 billion, a tiny 0.7% increase from the previous year, while NDF activity in the UK and US (the only centres to break out this product) was $180.6 billion, up 12.1% year-on-year. This increase was exclusively down to the UK, where NDF activity rose 23.4%, while in the US it declined 13%.

FX swaps volumes across all centres to report was $2,353.9 trillion, a 2.6% increase, while FX options activity was $251.3 billion per day, up 11.5% on the previous April.

April 2019 also marks the survey month for the global survey of turnover conducted by the Bank for International Settlements (BIS) and despite sentiment that activity would decline from the previous survey in April 2016, it is likely that there will be an increase in ADV – again driven by non-spot products – which could see a “BIS number” in the region of $5.7 trillion. It should be noted that some local FX committees collate and report data differently to the BIS, therefore the data sets are not directly comparable.

Comparing the committees’ collective data to the Aril 2016 surveys, spot volume across the six centres is down 4.25%, while outright forwards is up 17%, NDFs up a massive 69.7% (again entirely driven by the UK report, US activity was slightly lower in April 2019 than three years previously), FX swaps rose a very impressive 25.6% and FX options was up an equally impressive 27.7%.

In geographical terms the UK’s dominance of activity seems to grow unabated, in the latest survey it makes up 58.3% of all reported activity, up from just shy of 56% in April 2018 and well up from April 2016’s 52.3%. This percentage will be diluted in the BIS survey but it seems that for the moment at least, where banks are domiciling themselves in preparation for Brexit has had no impact on London’s standing as an FX centre.

In the UK, overall turnover was $2,858 trillion per day, a 9.5% increase year-on-year, and even spot volumes managed to creep higher, by 1.7% to $764 billion per day. As noted, NDF activity was up strongly in the UK report, there were also healthy increase in FX swaps, by 4.6% to $1,462 trillion per day; outright forwards, up 7.1% to $317 billion; and FX options, up 14.2% to $153 billion per day. One thing of note in the UK report is that NDF activity continues to grow as a percentage of FX options volumes and, if continued, the product may well overtake FX options in terms of daily activity in the next year.

The US saw a decline in activity across cash products. Overall ADV was down 18.4% at $810.9 billion, spot was off a huge 26.4% to $319.1 billion and NDFs, as noted, also fell. Somewhat surprisingly, given the speculation of the Federal Reserve’s monetary policy path, FX swaps activity was also down in the US, by 13.7% to $259.4 billion, the lowest activity since October 2015. FX options activity managed to inject some good news into the US survey by rising 18.7% year-on-year to $52.9 billion per day. Aside from October 2015, when activity was just $70 billion a day lower, this is the quietest reporting month for the US FX market since October 2012.

Singapore remains the third busiest FX centre with overall activity hitting $585.5 billion per day in April 2019, a 12% increase from a year earlier and a new peak for the centre. Activity was up across the cash product spectrum, spot ADV was $111.3 billion, up 14.9% year-on-year, while outright forwards was up 12.3% to $78.5 billion, FX swaps up 11% to $275.7 billion (into the bargain this means that FX swaps activity in Singapore exceeds that in the US for the first time since the surveys started). In contrast to the US report FX options ADV was actually down slightly in Singapore, by 8% to $30 billion per day.

Japanese FX activity remains steady, the Tokyo Foreign Exchange Committee reporting ADV of $423.7 billion in April 2019 – an 8.7% increase from the previous April. Spot volumes dropped 4.4%  year-on-year to $122.8 billion per day, while outright forwards activity rose 2.6% to $62.5 billion. FX swaps activity was up 5.5% to $224.4 billion, while FX options volume was up 11.5% to $9.7 billion per day.

Australia was the only centre apart from the US to see a decline in activity year-on-year, with volumes of $119.1 billion in April 2019, down 2.8% year-on-year. Spot activity actually rose slightly in Australia, by 3.4% to $33.2 billion per day, while outright forwards also was on the up, by 26.9% to $15.1 billion. The main culprit for the drop in activity was FX swaps, which largely reflected the lack of policy changes at the Reserve Bank of Australia by falling 13.1% to $65.1 billion. FX options activity was unchanged at $1.6 billion per day.

Closing out the reports, the Canadian Foreign Exchange Committee says that daily volume in Canada rose by 2.3% to $101.2 billion. There was a 17.9% decline in spot activity to $17 billion per day, while outright forwards volumes also fell, by 8.1% to $12.5 billion. FX swaps took up the slack, rising 11.9% to $67.7 billion, while FX options activity was unchanged at $4 billion per day.

Colin Lambert

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