Euro/sterling daily trading leapt to a record in October, according to the latest semi-annual survey from the Bank of England (BoE).
Average turnover reached $82 billion, up 50% from the previous survey in April. Turnover of USD/GBP, meanwhile, rose 11% to $326 billion.
The analysis, conducted by the bank’s foreign exchange joint standing committee, covers 27 financial institutions active in the UK FX market.
The swaps data series has been … difficult to understand
Simon Manwaring, NatWest Markets
Sterling volumes were driven by the UK’s departure from the European Union as well as the meltdown in risk markets and their subsequent recovery, which led to heightened volatility, said analysts.
“One-month volatility in EUR/USD was stable or fell through most of the second half of last year, yet GBP/USD one-month volatility continued to rise through October,” says Geoff Yu, senior EMEA markets strategist at BNY Mellon.
October in particular was characterized by EU-UK negotiations intensifying before the year-end arrival of Brexit.
“Volume on GBP pairs was higher than for the rest of G10 and therefore it shouldn’t be surprising that this was met by higher volumes relative to [the April data],” says JPMorgan global FX strategist Meera Chandan.
Simon Manwaring, global head of trading at NatWest Markets, notes that there was a sharp increase in Brexit-related speculation during the second half of the year as the possibility of the UK failing to reach a trade deal with the EU once again troubled the market.
“The political process provided headlines throughout and this fed into extra volatility and therefore higher volumes,” he adds. “Amongst G10 currencies, the pound is also fairly high beta to risk-off, and so it was also a good way to play the fall and resurrection of coronavirus.”
[JPY] was very well-behaved, which suggests lacklustre participation
Kamal Sharma, Bank of America
The BoE survey also showed swaps turnover rising significantly, while spot FX turnover rose by 4% between April and October, after 18 months of decline.
Neither result came as a surprise. The increase in swaps turnover was likely to have been a function of global central banks injecting substantial amounts of liquidity into the system, as well as market needs for USD funding, while spot FX turnover rose into October ahead of the US presidential election.
“The swaps data series has been very volatile and difficult to understand, so it would be hard to say this [increase] was unexpected,” says Manwaring. “The spot increase was definitely not surprising as it was an interesting and volatile period for trading with some key and easily understood macro drivers.”
One intriguing finding was that USD/JPY turnover fell from $313 billion in April to $266 billion in October, a drop of 15%. During this period, USD/JPY was overtaken by USD/GBP as the second most-commonly traded currency pair in London.
The data suggests that the yen may have lost some of its appeal as a safe-haven currency – a view at least partly supported by Bank of America G10 FX strategist Kamal Sharma, who says the Japanese currency has not reacted as it normally does through a market crisis.
Policy differentials within G10 are virtually non-existent
Geoff Yu, BNY Mellon
“It was very well-behaved, which suggests lacklustre participation,” he says. “The reason for this is pretty straightforward: if markets are unsure why it is not trading as a traditional risk-off currency, they will tend to stay away from it.”
BNY Mellon’s Yu goes further, suggesting that the yen has long since ceased to be a safe haven as carry trades have shrunk in size and scope.
“Policy differentials within G10 are virtually non-existent at present, so funding out of the JPY to own carry trades offers very little risk-reward,” he says. “This means during periods of risk aversion, buying is more limited.”
USD/JPY volumes have in fact been in decline since 2017, apart from a period of elevated trading in early April 2020, after which volumes again dropped as markets focused on recovery.
“The lack of major domestic events relevant to the currency is more likely the primary reason for reduced JPY volumes over this period rather than investor safe haven demand, which was reduced in any case over this period,” concludes JPMorgan’s Chandan.
