Surging yen volumes send FX market turnover to record levels

By:
Peter Garnham
Published on:

FX trading volumes surged to record levels in April, according to semi-annual surveys from the world’s largest central banks, as the yen market sparked back to life.

The activity levels recorded at reporting banks suggest average daily turnover on the world’s largest financial market might well exceed $5 trillion a day when the Bank for International Settlements conducts its more comprehensive triennial survey of FX volumes in October.

The increase in yen volumes came after the return to office of Japanese prime minister Shinzo Abe in December 2012 with a pledge to fight deflationary pressures in the country’s economy and the overvaluation of its currency.

Before Abe’s re-election, leading brokers had blamed Tokyo’s policy of intervention which, while limiting the yen’s strength as it approached record high nominal levels, did little to induce a weakening trend for stifling volatility and trading activity in the currency.

Since then, a concerted effort to loosen Japanese monetary policy and weaken its currency has given FX investors a trend to follow and has seen the yen fall by more than 20% against the dollar.

London retained its position as the world’s leading FX trading centre, with the Bank of England’s Foreign Exchange Joint Standing Committee (JSC) revealing average daily reported UK foreign exchange turnover – which includes spot, outright forwards, non-deliverable forwards, FX swaps, FX options and currency swaps – was $2.547 trillion in April.

That was 26% higher than in October 2012, 19% higher than April 2012 and the highest level of turnover recorded since the survey began.

The JSC said the rise was driven by a “substantial increase” in USDJPY activity, with turnover in the currency pair more than doubling to $503 billion. That saw it outstrip GBPUSD and made it the second most-traded pair in London.

Aside from currency swaps, all other products saw a “marked turnover increase” according to the JSC, with London FX spot turnover rising 38% since October 2012 to a fresh record of $1.006 billion per day.

 Average daily spot FX volumes hit fresh highs ($ billion)
 
 Source: Central bank FX surveys

Meanwhile, the New York Fed’s Foreign Exchange Committee revealed average daily volume across all FX products in North America rose by 27% since October 2012 to stand at a record $1 trillion in April. Average daily spot volumes rose 36% to $518 billion.

The New York Fed said trading in USDJPY accounted for roughly 47% of the increase in total average daily volume. That rise in turnover occurred across all market participant types, but was particularly pronounced for “other financial customers” – such as hedge funds and retail aggregators.

In Tokyo, average daily reported volumes across all FX products rose 15.8% to $348.1 billion, but the rise in spot volumes was more marked as they climbed 66% to $149.8 billion.

Gerald Segal, managing director at online FX analysis firm LeapRate, says 2013 has seen a great turnaround in the retail FX sector in Japan, which has seen the return of Mrs Watanabe, the stereotypical, yield-hungry Japanese retail FX investor, in numbers never seen before.

That, says Segal, has seen trading volumes at some of Japan’s largest retail brokers exceed $1 trillion a month.

“While conditions in the retail FX industry can – and often do – change rapidly, we expect more sunny skies for FX brokers in the coming months,” he says.

“Growth might not continue at the pace seen in the first half of the year, but at current volume levels many FX brokers should be able to generate record profits.”

Elsewhere, average daily reported FX volumes rose 5.5% to $381 billion in Singapore in the six months to April and climbed 20.4% to $61.4 billion in Canada.

In Australia, however, average daily FX volumes across all products fell 2% from October 2012 to $181.7 billion in April, but average daily spot volumes were up 14% to $48 billion during the period.