A report published Tuesday by the bank of central banks, the Bank for International Settlements (BIS) in Basel, Switzerland, shows how globalisation is surging in the foreign-exchange markets.
In April this year, daily turnover in currency markets rose to $3.2 trillion, the bank said.
The daily volume is more than the annual economic output of Germany or China and it has risen by 71% from the BIS's last survey in 2004, the largest jump in volume since the bank began conducting its benchmark survey in 1989.
The BIS said technology was a big factor in triggering the explosion of currency trading, with automated trading models allowing investors to continually engage in small moves in currencies. "A significant expansion in the activity of investor groups including hedge funds" as well as individual investors also contributed to the increase," it said.
The report showed that players in the currency market are increasingly dependent on complex instruments to make bets or reduce their exposure to risk. Trading in financial derivatives linked to currencies soared to $2.1 trillion a day, the report said, a rise of more than 70% since 2004. Large companies are participating in a more active and sophisticated approach to managing currency exposure.
The biggest rise in recent years is the popularity of cross-currency swaps, in which two parties agree to exchange streams of interest payments in different currencies for a certain period. Those daily volumes grew by 281% between 2004 and 2007, a strategy used by investors seeking to hedge rising investments in foreign currency bonds.
Emerging-market currencies were involved in almost 20% of all transactions in April. The share of the Chinese yuan in the total currency turnover rose, although it remains very small. It remained behind currencies like the Korean won and the Polish zloty.
The US dollar remains the world's pre-eminent currency. The dollar was involved in more than two-fifths of all daily currency transactions, a slight decrease from 2004, though up from 1995. That was mostly due to the currency's depreciation over the last three years.
The BIS says that in April this year, 54 central banks and monetary authorities participated in the Triennial Central Bank Survey of Foreign Exchange and Derivatives Market Activity. They collected data on turnover in traditional foreign exchange markets – those for spot transactions, outright forwards and foreign exchange swaps – and in over-the-counter (OTC) currency and interest rate derivatives. This was the seventh global survey since April 1989 of foreign exchange market activity and the fifth survey since April 1995 additionally covering OTC derivatives market activity. Today participating central banks and monetary authorities are publishing their national survey results and the BIS is releasing preliminary global statistics from the survey. The two global headline figures from the April 2007 survey are the following:
Turnover in traditional foreign exchange instruments increased by an unprecedented 71% to $3.2 trillion. Although this was broad-based across instruments, growth in FX swap turnover was particularly strong, up by 82% in April 2007. Reporting dealers' foreign exchange market turnover with both other financial institutions and non-financial customers more than doubled. As a consequence, the share of transactions between reporting dealers and other financial institutions, which mainly comprise hedge funds, mutual funds, pension funds and insurance companies, increased by 7 percentage points to 40%.
Activity in OTC derivatives markets continued to expand at a rapid pace. Average daily turnover of interest rate and non-traditional foreign exchange contracts increased by 71% to $2.1 trillion in April 2007. Turnover of foreign exchange options and cross-currency swaps more than doubled to $0.3 trillion per day, thus outpacing the above-mentioned growth in "traditional" instruments such as spot trades, forwards or plain FX swaps. Less brisk growth was recorded in the much larger interest rate segment, where average daily turnover increased by 64% to $1.7 trillion.
The BIS plans to publish, in November 2007, the preliminary global results of the second part of the triennial survey covering open contracts outstanding in OTC derivatives markets at end-June 2007. A more detailed analysis of the results for the traditional foreign exchange markets will be published in the December 2007 BIS Quarterly Review. The final global results of both parts of the 2007 triennial survey are expected to be released in December 2007.
by Finfacts Team