Trading in the global foreign-exchange market jumped to an all-time high amid heightened volatility, according to the Bank for International Settlements’ triennial survey.
Average daily transactions in April increased to $7.5 trillion, up 14% from the same month in 2019. This compares with a growth rate of 30% in 2019 and a contraction of 5% in 2016.
After years of benign trading currency, volatility surged as higher than expected inflation caused central banks to ratchet up interest rates while Russia’s invasion of the Ukraine shook financial markets to their collective core.
Large currency swings created “inventory imbalances” among dealers, forcing them to offload positions in the interdealer market more frequently, according to the Basel, Switzerland-based institution.
On the other hand, Covid restrictions in places like China and Hong Kong, may have suppressed the turnover, it said.
“The growth in trading volumes between 2019 and 2022 reflected greater interdealer trading,” BIS said in the report. “This uptick in interdealer trading may have reflected the elevated volatility in currency markets in April 2022.”
The US dollar retained its spot as the most popular currency and was on one side of 88% of all trades that took place in April, unchanged over the past decade.
At $3.5 trillion, daily trading volume among dealers accounted for 46% of the total global turnover, up from 38% three years ago.
By contrast, the market share of trading with “other financial institutions” incuding including non-reporting banks, hedge funds and institutional investors dropped to 48%, from 55%.
The report also showed that London’s standing as the global hub for foreign currency and derivatives trading has diminished due to fierce competition from other major financial centres.
Market participants believe that Brexit is continuing to take its toll. The UK government plans further deregulation in the City to make it more attractive to international investors.
London accounted for 38% of global turnover for foreign exchange trading in April 2022, a five percentage point drop since 2019, when its share was 43%.
In over-the-counter derivatives markets, its share slipped to 46% from 51% three years ago.
“Given the rapid increase in volatility across the FX market due to macroeconomic and geopolitical forces in the past year, it’s no surprise to see daily global FX volumes reaching record highs in BIS’ latest triennial survey,” said Eric Huttman, CEO of MillTechFX.
He added, “In recent months, the strengthening of the dollar has caused problems for global companies, particularly those that generate revenue overseas and consolidate in the US. As a result, we are likely to see a renewed focus and possibly increases in hedging from those with a programme in place.
Firms which don’t have a formal hedging strategy or rely on ‘natural hedging’ are likely to implement programmes to prevent negative impact from currency volatility on their balance sheets.”
Jerome Kemp, ex-global head of Citi OTC futures and clearing, now President of Baton Systems, said, “These initial findings show that the reality of Brexit is starting to bite on market infrastructure. Banks have set up EU entities, and these entities have been pushing risk back to their UK arms.
This has significantly increased the complexity of the transaction lifecycle. An additional legal entity in the chain means that operational processes need to be much faster and more transparent.”
