Debt crisis dents euro’s reserve credentials
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Foreign Exchange

Debt crisis dents euro’s reserve credentials

The international role of the euro has shrunk to the lowest level since the creation of the single currency, according to the Bank for International Settlements (BIS).

The revelation came as the BIS released the preliminary results of its triennial central bank survey, the most comprehensive report available on turnover in the world’s foreign exchange market.

Trading in foreign exchange markets averaged $5.3 trillion per day in April 2013, according to the BIS, up 33% from $4 trillion in April 2010 and 61% higher than the $3.3 trillion recorded in 2010.

The US dollar remained unchallenged as the dominant currency on the world’s FX market, appearing on one side of 87% of all trades in April 2013, up from 84.9% in 2010.

In contrast, the report revealed the euro has lost market share since the beginning of the eurozone sovereign debt crisis in 2010.

Although it remained the second most-traded currency, the euro fell from being on one side of 39% of all trades in April 2010 to just 33% in April 2013, the lowest level since the single currency’s introduction. Indeed, with an increase of just 15%, trading in the euro expanded by much less than the overall market.

There was a surge in yen volumes, with turnover rising by 63% since the 2010 survey. That saw USDJPY volumes rise by 70%, raising the yen’s share of global FX volumes by four percentage points to 23% in 2013.

According to the BIS, most of the increase in yen trading occurred between October 2012 and April 2013 as investors anticipated a shift in monetary policy from Japan under new prime minister Shinzo Abe.

Abe was re-elected last year with a pledge to reinvigorate the Japan’s economy and fight currency strength. That produced a sharp fall in the yen, providing a bandwagon that currency investors were happy to join.

 FX market turnover by currency (%)
Source: BIS 

Among the other most actively traded advanced economy currencies, the Australian dollar and the New Zealand dollar gained market share, while sterling, the Canadian dollar and the Swedish krona lost ground in relative terms compared with the 2010 survey.

The Swiss franc also lost market share as the Swiss National Bank’s decision to impose a floor in EURCHF in 2011 weighed on activity in the currency.

The survey also showed a sharp rise in the global importance of several leading emerging market currencies.

Trading in the Mexican peso climbed to $135 billion per day, pushing it into the top-10 most-actively traded currencies with a market share of 2.5%. The rouble also saw a sharp rise in volumes, sending its market share above the Hong Kong and Singapore dollars to 1.6%, and making it the 12th most-traded currency.

The biggest increase in trading came in the renminbi, as China’s increased efforts to internationalize its currency saw it rise to become the ninth most-traded globally.

Renminbi turnover jumped from $34 billion to $120 billion per day, driven by a sharp increase in offshore trading. That saw the renminbi’s share of global FX volumes more than double to 2.2%.

The growth of FX trading was driven by financial institutions other than the 1,300 banks and reporting dealers that participated in the 2013 survey.  

 FX market turnover by counterparty
 Source: BIS

That market segment, which includes smaller banks that do not act as dealers, institutional investors, hedge funds and proprietary trading firms and official sector financial institutions, became the largest counterparty category in the survey for the first time in 2010, with volumes exceeding those on the interdealer market.

That trend continued, with the counterparty category defined by the BIS as “other financial institutions” (OFI) seeing trading activity rise by 48% to $2.8 trillion in 2013, up from $1.9 trillion in 2010. That meant OFI accounted for 53% of global FX volumes, up from 48% in 2010.

For the first time, the BIS broke down the turnover figures from the OFI category.

That showed, as can be seen in the chart below, that non-reporting banks – smaller and regional banks that serve as clients of larger FX dealing banks and do not engage in market making in leading currency pairs – accounted for about 24% of global FX turnover in April 2013.

Furthermore, institutional investors as well as hedge funds and proprietary trading firms each accounted for 11% of turnover. Meanwhile, for all the market focus on the activity of central banks in the FX market, official sector financial institutions accounted for less than 1% of turnover.  

 Proportion of FX market turnover by counterparty
 Source: BIS

Inter-dealer trading grew by 34% to $2.1 trillion in 2013, up from $1.5 trillion in 2010 and in line with the pick-up in volume across the market as a whole. Consequently, the share of inter-dealer trading in global FX transactions remained roughly constant at 39%.

However, dealing with non-financial customers decreased substantially, as the economic slowdown triggered by the financial crisis weighed on volumes.

Indeed, trading with this category, which includes corporations and governments, dropped to $465 billion per day in 2013, down from $532 billion in 2010. That meant that non-financial customers accounted for just 9% of global volumes, down from 13% in 2010 and 18% in 2007.

Of course, a pick-up in economic activity in the years ahead could well boost activity from non-financial customers. However, it would appear that OFI, which just accounted for about 30% of volumes as recently as the 2004 survey, remain the engine room of growth in the global FX markets.

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