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The currency markets are shrinking as the 'golden age of growth' moves East

Volumes in global currency markets shrunk in the last three years, according to the Bank of International Settlements (BIS), who noted a tilt away from London towards financial districts in Asia.

The latest survey by the Basel-based institution – known as the central bank of central banks - showed that overall trading in foreign exchange markets averaged $5.1 trillion per day in April 2016. This is down from $5.4 trillion in April 2013, "a month which had seen heightened activity in Japanese yen against the background of monetary policy developments at that time," the BIS noted.


London share falls

Looking at the daily spot foreign exchange market – where the underlying asset is traded rather than a derivative - transactions fell to $1.7 trillion per day in April 2016 from $2.0 trillion in 2013. This was the first fall since 2001, according to the new Triennial Central Bank Survey report.

It also noted that the U.K.'s share of the industry declined to 37.1 percent from close to 41 percent three years ago. The market in New York increased its share slightly and China and Japan also saw modest rises.

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Regarding the global currency market, Kit Juckes, global head of FX strategy at Societe Generale said the decline is "(more than) all due to a fall in EUR/USD,EUR/JPY, EUR/CHF and AUD/USD trading."

"Ignoring the last of these we can put some of this down to the fact that the euro has been very subdued this year," he said.

However, he added: "Volumes have grown fast for almost all of my career and this represents the end of a golden age of growth in the market as regulation and scandals have tarnished the industry's reputation." He explained that the center of gravity is "moving East" as renminbi trading picks up, in particular. Korean Won and Taiwan dollar volumes are up too, he added.

FX swaps rise

The turnover of FX swaps rose further, reaching $2.4 trillion per day in April 2016. "This rise was driven in large part by increased trading of FX swaps involving yen," the report noted. A foreign exchange "spot transaction" is an agreement between two parties to buy one currency against selling another currency at an agreed price for settlement on a set date (either immediately or soon thereafter).

An FX "swap agreement" is a contract in which one party borrows one currency from, and simultaneously lends another to, the second party, the BIS explains, creating a form of "risk-free collateralized borrowing/lending."

The latest survey, which sheds light on the size and structure of global foreign exchange (FX), showed that the U.S. dollar remained the dominant vehicle currency, being on one side of 88 percent of all trades in April 2016. The euro, yen and Australian dollar all lost market share. In contrast, many emerging market currencies increased their share.

The renminbi doubled its share, to 4 percent, to become the world's eighth most actively traded currency and the most actively traded emerging market currency, overtaking the Mexican peso.

The rise in the share of renminbi was primarily due to the increase in trading against the U.S. dollar. In April 2016, as much as 95 percent of renminbi trading volume was against the U.S. dollar involved the participation of central banks and other authorities in 52 jurisdictions, the BIS stated.

The survey collects data from close to 1,300 banks and other dealers in their jurisdictions and reported national aggregates to the BIS, which then calculated global aggregates.

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