Foreign exchange debate: The future’s bright despite the tough fines


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In the second part of Euromoney’s foreign exchange debate, which took place in late 2008, industry experts consider the future for the business. There is still cause for optimism, although inflation remains a big unknown and there are real fears of governments’ ability to sustain debt levels.

Part one: Foreign exchange debate - Investing in FX: learning history lessons

Delegate biographies: Learn more about the panelists

Executive summary

• Foreign exchange will go through tougher times but the future for the business remains bright

• E-commerce will play an increasingly important role

• Inflation will remain a key theme

• The spectre of government bankruptcies looms

DB, HSBC Are you optimistic for the FX business?

CKG, Société Générale Absolutely – for a number of reasons. First, while global GDP will slow, corporates will still need to carry out commercial transactions. Second, financial institutions will still need to chase alpha. Third, volatility has picked up, meaning the first two points become more relevant. Fourth, bid-offer spreads have widened, meaning the competitive fall-on-your-sword attitude to capture market share will abate. But finally, for banks that have pressure on balance sheet and capital usage, foreign exchange offers the highest revenue per unit of balance sheet used, and it is scaleable. The capital challenges that face many banks and the greater sensitivity for end users to counterparty credit risks mean that the door is open for tier 2 banks to make substantial gains in market share – that’s exciting.

EP, UBS With regard to FX prime brokerage, it is not explicitly a financing business but is clearly facing a more difficult operating environment. It is primarily a trade-processing service with some elements of counterparty risk intermediation. Operational risk, settlement risk, funding/liquidity risk and counterparty risk have all increased in the past 18 months. These risks must be tightly managed and they are quickly getting repriced. However the service remains in demand by clients seeking to outsource trade processing, manage multiple liquidity channels and diversify counterparty risk. The return on process automation is greater than ever for prime brokers, given the pressure on staffing levels and the greater potential cost associated with processing errors. Overall, the greater focus on front-to-back risk management and process automation are welcome developments for users and providers of FX prime brokerage.

IG, Credit Suisse From the point of view of profitability per dollar there is no reason to be too negative. At the last of these roundtables it was claimed that the growth in the FX market was driven by spread compression. That is hardly the situation now.

CKG, Société Générale  There is even margin now, that is right.

DB, HSBCBut is volume not going to collapse? World trade is a $14 trillion a year business; FX is $3 trillion a day, so obviously we don’t generate our business from trade, and credit finance is becoming a new issue again. You might make up for margins, but you will lose the volume.

CKG, Société Générale  Not necessarily.

DB, HSBC We’ve got to lose the volume because it’s based on financial turnover. If financial turnover goes down and there is deleveraging, which means there is less turnover and if all of us agree that FX is a good business to be in, we’ll all be in there together and it will become more difficult. You could get a difficult year and the survivors then do well, but it’s difficult to be optimistic relative to history.

NS, Deutsche Bank With increased volatility there is an increased need to hedge future returns, whether from the corporate community, asset managers with equity class, or any other asset classes. Returns are being influenced by FX exposure. You will see a new entry into the market although it will not be levered or particularly fast money.

IG, Credit Suisse  The natural floor of the level on FX is higher than on certain other assets because there is an amount of world trade that will continue. On the other hand there was a lot of FX activity three months ago that is not happening now and many players aren’t there any more. I don’t know from a liquidity point of view what that does to the intra-day dynamics because it was an important part of how the market traded. So while a layer of activity has gone, there is a significant area that will remain and give us ballast.

EP, UBS A great deal of FX volume growth can be attributed to alpha-seeking participants such as hedge funds, proprietary trading firms and retail clients, all of which have been drawn to FX because of features such as innovative execution technology, deep liquidity and relatively narrow bid-ask spreads. Some of this volume will likely erode as de-leveraging takes its course but a good portion of that lost volume will be replenished by demand for hedging strategies now that FX volatility is so much higher.

CC, SSgA We’ve seen a spike in interest and demand for passive hedging strategies, and expect that the demand for leveraged alpha strategies will be diminished. We haven’t seen diminished demand yet of more vanilla unleveraged alpha strategies, but that may come as well. However, that may be more than offset by demand for passive hedging, particularly from the US and Japan where people thought their currencies were a one-way bet for a decade or more. Japan is waking up to the fact that those handsome returns from overseas assets were largely currency-denominated.

RO, OandaA lot of that demand will not be static strategies but dynamic strategies, which will add volume.

CKG, Société Générale  Raised levels of volatility will bring in additional volumes as the volatility can be exploited, or may need to be countered.

RO, Oanda There will be a lot of hedging demand and that will generate additional profit.

DB, HSBC But it’s this idea that ‘We’ll be all right, Jack’ that I have a problem with.

CKG, Société Générale  I’m not saying that. The question was: ‘Will there still be a business?’ Yes. ‘Will there still be volumes?’ Yes.

MC, Aberdeen AM I think banks will see less FX volume. Central banks’ activities will be greatly diminished. There were a lot of people trying to arb the market. We’re looking at high-frequency trading strategies being taken out as our more macro-based approach provides opportunities. Macro will benefit but the overall volumes in the FX market will be considerably lower.

CKG, Société Générale  A lot of growth in daily volumes has been led by increased usage of FX e-platforms and plugging client APIs into single-dealer systems. While this is great for market share statistics, it can have mixed implications for greater operational profitability. But with wider bid-offers, average higher market volatility, client trading opportunities can increase even with reduced global trade, for example, corporates having asset/liability issues to hedge, or financial institutions more alpha opportunities to exploit. So I remain optimistic, and bank capital issues mean the landscape can change dramatically.

E-commerce trends

PL, Polar CapitalOne place where trading volumes have expanded significantly is e-platforms. Tell us about some of the trends you expect.

IG, Credit Suisse  Post-trade services is an important area. Besides that, our more unique developments have been in two directions. The first is the process of price formation – making a price that people want to trade on and being able to risk manage it in competitive markets. We made a big investment in getting that right and doing it differently because in times of high volatility a lot of old-school e-commerce models break down. And volatility has been at record highs since September; so the work we’ve done on the maths of price-making has been very timely. Clearly, so long as spreads remain wide it’s easy to make a good return in times of high volatility. However, if spreads come back in while volatility remains high, a new approach is needed.

The second direction is to offer clients tools for taking some of the risks themselves. In these markets, when risk prices can have conservative spreads, that can be appealing for some clients who may feel that the spreads have gone wider than they need to. To cater for this we have made algorithmic trading tools available directly to our clients. On the one hand, we have partnered with our equities group and made an FX version of Advanced Execution Services available. We’ve also developed some FX-specific algorithmic trading tools that offer different characteristics.

PL, Polar Capital Has the platform held up and been able to adapt?

IG, Credit Suisse Because we were slow to come to FX electronic trading, our platform on the pricing side is currently probably the newest. When we were analysing our pricing prior to the launch we didn’t forecast the volatility and liquidity changes any faster than anyone else, but we did see that a continuing increase in volatility and a decrease in liquidity could potentially leave us in trouble. We accordingly made extensive changes in pricing formation and risk management; we started around the second quarter and the new model has so far held up well.

DB, HSBC The model for e-commerce is changing totally though.

IG, Credit Suisse  In the first-generation models people did three things, all of which are difficult in this market. The first is to dump flow to traders and let them trade out of it – that is tough in this market, where everyone else is hedging electronically. The second is to take your spread and try to trade your way out straightaway. Traditional implementations of this are OK in volatile markets, so long as spreads remain high, but give the market maker no capacity for determining how to bring spreads back in when vol and liquidity remain patchy. The third is to route flow to a netting engine and hope for the best, which is also really tough in volatile markets. So all three of these first-generation approaches will be problematic if and as spreads start coming in. There are alternatives and that is what we spent the last year working on. Electronic trading is still a viable way to do business and the difficult market conditions make it more so.

PL, Polar Capital Relationships will be even more important.

IG, Credit Suisse  That’s very true and the myth is that relationships don’t matter in electronic trading.

DB, HSBC Do you think they will be substitutes or complements?

IG, Credit Suisse I am very sceptical of the analysis that says FX is like equities, only three years behind. However, there are some parallels. In equities, when we look at what happened on the cash side several years ago, the spot traders were apprehensive about algorithmic trading, which we developed very heavily. However, their business stayed much the same size and it centred increasingly on research-driven trades, block trades, option support and so on. Dealing with smaller trades and more manageable flow trades became increasingly electronic, and this is where there was an explosion in algorithmic trading. I would expect something similar in FX. There will be a part of the FX business that is better done by humans. On the other hand, for a lot of volume flow, we’ll give sharper prices over the platform, and that will be where a lot of trade goes.

EP, UBS As client adoption of electronic trading has progressed, we have seen many permutations of service needs develop. Creating a trading ticket, executing it efficiently over whatever channel is judged to be best in a given circumstance and providing the requisite post-trade enrichment together form a front-to-back value chain. Price and relationships will clearly remain critical. But as electronic trading tools and techniques evolve further, the availability and quality of these additional levels of support will play an increasing role in determining how business is allocated to provider banks.

DB, HSBC What do you think, Collin?

CC, SSgA We don’t use a lot of electronic platforms because the volumes we do tend to be larger than what is allowed on a platform, so unless we want to click all day long, it’s still more advantageous to call up a broker. Not everyone is in our shoes and I’m curious to know if there has been any change in the sizes that you are willing to do on electronic platforms, given the increased volatility?

IG, Credit Suisse  Our electronic ticket size is currently much bigger than the average because of where we come from. Our aim is to be able to do whatever size we want electronically.

MC, Aberdeen AM As an end user I see huge differentiation at the moment. In this environment where price discovery is a lot more difficult, a lot of e-platforms completely fall down because the people pricing the risk price it wider than the market ever is, so why would you ever use it? Where it has been very useful is where you are able to transfer the risk back to yourself, and the CSFB platform is one of those that we have used to do that. On average the sort of field we were able to obtain in large sizes of several million dollars is significantly better than it would have been on average to transact in the market. In that environment these things are incredibly complementary. Anything that can improve my cost of execution over different environments I will use more and more. In this environment it is difficult because nine out of 10 platforms are worse, but if you can find the one that is consistently better than working an order with a trader, you will use it.

What role will central bank intervention have?

OG, SGAMMaybe central banks will change their view on targeting asset prices. So far the only market prices that have been targeted are exchange rates. On the one hand, governments or central banks are used to intervening in FX markets when they consider that exchange rates are excessively misaligned with fundamentals. On the other hand, central banks have always declined to meddle with stock markets, arguing that they cannot know better than markets about fair values. It is inconsistent. Do central banks know better about fair values in currency markets rather than in equity markets?

MC, Aberdeen AM I’m not sure that they know what a fair value is for exchange rates.

OG, SGAM But perhaps it’s easier to meddle with FX because it is a zero-sum game. It is more asymmetric with equity markets. When the equity market is down, all the shareholders want central banks to intervene. When it’s up, nobody wants them to intervene!

PL, Polar Capital Central banks’ history of intervening in FX markets is not a happy one.

OG, SGAM There have been some cases of successful, coordinated FX interventions. Nevertheless, we have to consider this experience when we debate about asset-price targeting, since it is the only experience we have.

PL, Polar Capital Maybe they’ve just got one tool. Central banks have one tool, interest rates, and maybe they don’t intervene in the equity market, they use interest rates.

DB, HSBC It makes it easier if everyone has practically zero interest rates.

OG, SGAM Keep also in mind that in the new era of non-conventional monetary policies, central banks are ready to target long-term government bond yields and even to purchase private securities directly on the market, including stocks.

MC, Aberdeen AM But they are not going to target the asset markets. They are not going to make a policy to drive the equity market down.

NS, Deutsche BankThe current solution may well create the next asset market bubble.

RO, Oanda I agree.

CKG, Société Générale We’ve had the tech bubble, the bond bubble of 2003, the housing bubble, the commodity and EM bubbles. Any others?

EP, UBS And tulips and the shares of the South Sea Company long before any of these. The challenge is to learn from history and architect a better future.

CKG, Société Générale  What class is there left to have a bubble with?

PL, Polar Capital We don’t need a new one; we can just go back to one of the old ones.

RO, Oanda We could have an inverse currency bubble.

CKG, Société Générale  Is that a financial instrument?

PL, Polar Capital Are you talking about generating inflation?

RO, Oanda No. What happens if all the central banks steer towards zero interest rates? Suddenly the investors, hedge funds, corporations will revolt and move out. Then you’ll have huge currency volatility.

PL, Polar Capital Move out to what?

RO, Oanda To whatever other currency is the best bet.

PL, Polar Capital But if they all have zero rates, what then?

OG, SGAM When you have deflation and zero rates, everybody wants to hold cash.

DB, HSBC If you get that situation, the surplus countries with big current account surpluses and big net external assets start performing very well.

OG, SGAM Exactly. Remember also that during the Japanese deflation some people suggested that cash should be taxed. When you are not able to cut rates below zero you have this cash bubble.

DB, HSBC Generating inflation expectations higher in government spending is taxing cash to try to create inflation.

OG, SGAM Yes, inflation is nothing else than a tax on cash.

MC, Aberdeen AM  The next cycle will be about inflation. The successful outcome to today’s deflationary problems will involve a much higher level of inflation than we’re used to. The unsuccessful outcome will involve global deflation for a long time. Policymakers will try to avoid this at all costs.

PL, Polar Capital But potentially the very unsuccessful outcome would also involve high inflation.

MC, Aberdeen AM Yes, but the central banks think they can target inflation much more easily than deflation.

EP, UBS Longer term, inflation is arguably a risk. Nominal interest rates are low and heading lower, creating the risk that perhaps once again interest rates are kept too low for too long, though this seems a far-off risk at the moment. And as governments issue increasing amounts of debt to relieve pressure in the private sector they will eventually have a dangerous incentive to make their debt problem smaller by targeting higher inflation.

DB, HSBC That has massive currency implications.

EP, UBS It does. It depends on what problem you are trying to solve.

The deflation/inflation question

PL, Polar Capital People talk about monetizing debt and generating inflation and the principal goes down, but the cost of rolling your debt goes up massively. History shows that the one thing you definitely don’t want to do if you’ve got a big pile of debt is try to monetize it. You quickly go down the same path as Zimbabwe.

MC, Aberdeen AM But history is also littered with repeated mistakes. Isn’t deflation the biggest issue for the global policymakers?

PL, Polar Capital You want to avoid deflation too, but you don’t want to generate inflation. You’ve got to generate the right target and there can be a big debate whether the right target is 2% or 4%, but it’s not 8% or 10%.

MC, Aberdeen AM No, so if the policy is successful they generate a level of inflation that allows us to function again and inflate some of the debt away. If they miss on their policy, they may have a problem.

OG, SGAM Japan did monetize government debt, but they were not successful in reflating.

PL, Polar Capital They didn’t monetize it, did they? They haven’t ever managed to generate the inflation.

OG, SGAM The so-called quantitative easing policy of the Bank of Japan was akin to a monetization of government debt. But you are right, this experience proves that this kind of policy does not necessarily succeed in generating inflation.

DB, HSBC They tried their best though.

PL, Polar Capital They’ve tried hard and I also wonder if central banks would feel overconfident about their ability to control inflation. The period over which they have been targeting inflation it has been easy to succeed because of globalization and deflation generated from China. Also we may have more faith in central banks targeting inflation than they know we should have.

RO, Oanda Can’t the situation be resolved by massive bankruptcies?

PL, Polar Capital It’s much more likely than going down the path of monetizing the debt, you’ll go down the path of debt forgiveness – just write it off. That is much more likely to happen. This would be similar to what they did after the war.

DB, HSBC The problem is we haven’t had the real economy go down yet. We don’t even know what the solution is. We don’t know how deep the recession will be. People are already looking for the turn. Everybody agrees that you buy dollars and bonds and worry about the next phase that comes along when we get there. We don’t know how far we are down the road. I’m not even looking for the recovery or how things will be different. I just want to get through this.

PL, Polar Capital You talked earlier about three, five years as your horizon, but you were confident that it’s not 18 years.

DB, HSBC Everywhere I’ve done big presentations I ask who thinks it will be one year and who thinks it will be between one and three years. I’d say 70% of people expect it to be one to three years.

CKG, Société Générale  Do you think they’re right?

DB, HSBC That’s the median. The median is always right – you know that, Chico. The rest think it will be three years or longer.

CKG, Société Générale I also look at the debt markets, and the default rates on most fixed-income securities are not as bad as the pricing of the underlying security would suggest.

PL, Polar Capital But the economy only slowed down two months ago.

CKG, Société Générale Yes, but at the moment – that’s why I entered a caveat – we don’t see in our forward forecasts the default rates getting to the levels that the securities are pricing.

DB, HSBC But six months ago we didn’t see them getting to today’s levels.

CKG, Société Générale  That’s not quite right. SG’s equity strategists have been the most bearish in the market for the past two years. They are talking about the Japan situation in the world. The point of optimism is that if the default rates don’t get to the levels that are being priced in, banks may ironically find themselves accruing their way out. If you get to a situation in six to nine months where the value of the default rate has not got to the level, suddenly these banks are sitting on a lot of hugely undervalued assets and it will recapitalize.

RO, Oanda And the steep yield curve is very favourable to the banks.

CC, SSgA  What is the possibility of a lost decade like Japan? What steps, if any, can be taken that Japan didn’t take? Is the fact that the global policymakers have moved more quickly enough to save us from that fate, or are there other, more innovative steps that haven’t been taken?

PL, Polar Capital People are quite unfair on Japanese policymakers. They did a lot quite quickly; they made the biggest fiscal injection since the Marshall plan. They cut rates after six to nine months.

CKG, Société Générale The problem was that they were slow to recapitalize the banks.

PL, Polar Capital Yes. The Japanese told the rest of the G7 to recapitalize their banks straightaway because that was their biggest mistake. However, while it seems that we are recapitalizing our banks quickly and aggressively, no one thinks the banks are going to be lending aggressively for a long time.

DB, HSBC Even if they do, the other side of that is whether anyone wants it.

PL, Polar Capital Absolutely. Money demand is likely to collapse.

DB, HSBC We are tackling the supply side and by the time we’ve solved that, as I’ve said before, we’ve still got the recession and the demand side.

PL, Polar Capital Yes. Paul Krugman just won the Nobel prize and that was his argument about Japan. He said it was a complete misnomer that the problem in Japan was money supply, it was the collapse of money demand and that we shouldn’t be overly confident that we could solve the problem easily if it came to us. We’ll be finding out if he’s right.

CKG, Société Générale  Was that because Japan had a huge savings glut so people didn’t need to borrow?

DB, HSBC No. They were sitting on huge amounts of debt in their households and they didn’t want to take on any more.

PL, Polar Capital They were doing what we’re doing; they were redressing their balance sheets.

DB, HSBC If your house goes down from £1 million to £500,000 and the bank comes and offers you more money, you will say: ‘No thank you.’

CKG, Société Générale There is a paradox in Japan that while some of the asset prices dropped, many people rode that wave. The issue was that they had a huge savings situation. You can’t have a situation where you are saying that people didn’t want to borrow, because they had savings.

PL, Polar Capital Those savings were a function of the fact that it was difficult to get insurance on your house in Japan, so they needed to have higher precautionary balances in places like Tokyo because they couldn’t get earthquake insurance. Nobody here has been holding any precautionary balances, so the first thing that everyone needs to do is to get back to zero.

MC, Aberdeen AM Yes, but the end game here is that we need to create some in the economy. Savings rates in the US need to go up. The end game is slower growth for a period. The policy response is to make it so that it’s not so slow that you end up in a self-fulfilling prophesy that renders policy broken.

PL, Polar Capital What are your fears and hopes?

CKG, Société Générale  I hope we can all find the correct balance between performance and compensation for performance, as that can ultimately be supportive for organizations, rather than what is currently perceived as an asymmetric bias to the employee at the expense of the organization.

OG, SGAM There will be renewed interest for absolute return funds based on FX. During the past recent years, most absolute return funds were based on credit and of course they have been badly hurt by the crisis. By comparison, currency funds have recorded a decent performance and have not suffered liquidity problems. Investors are still seeking absolute return products, but they want more transparent and more liquid products. As an asset class, currency has the advantage of being liquid and uncorrelated to traditional market returns, two qualities highly praised in the new environment.

MC, Aberdeen AM Unfortunately a lot of currency funds that were very successful in selling to investors that hadn’t previously entertained using them were tied up in the carry mentality and have underperformed to a level that is incomprehensible to many.

PL, Polar Capital When we launched our fund and were telling people what we did they said: ‘The trouble with your fund is that it doesn’t have any beta in it.’ We said: ‘But it’s an absolute return fund.’ They said: ‘People like beta though in funds.’

OG, SGAM Maybe these people believed more in beta than in alpha because they could see it and touch it!

PL, Polar Capital It was true. People said: ‘Can you buy some Chinese equities?’ We said that wasn’t what we did. One of the advantages of foreign exchange is that there is no beta in it. Our clients have learned that you might not want to have beta at all.

CKG, Société Générale  If you make a Libor fund there is beta – it’s Libor and you get a lot of currency Libor funds.

MC, Aberdeen AM We got to a point last year where there was discussion that there was a beta currency fund and it was called carry.

CC, SSgA  A good proportion of the carry trade is a beta trade. It’s a risk premium, often for investing in pro-cyclical economies, where the currencies always go down at exactly the same time your other assets go down. There is little diversification benefit from holding them, so you should get a premium. If you agree with that premise it is unsurprising what has happened to the carry strategy as every other beta trade has massively underperformed. On the other hand, I would agree there is limited beta in currencies.

PL, Polar Capital A lot of the money flowed into the currency funds that might manage to find a way to correlate themselves with beta, which was the last thing you should want to do if you were trying to leverage beta – which is the last thing you’d want to do if you are adding a currency fund for diversification.

NS, Deutsche Bank We’ve set up several indices where you can track returns, so either a pure carry index in either G10 or emerging markets or if you look at other popular momentum or valuation-based strategies, you can use a combination of all three to create a currency index and use that as a potential benchmark. You’d be surprised because it has performed quite well this year and that’s because valuation and momentum have performed very well this year versus the carry side. You can create beta indices but you have to keep it simple. Anything optimized or over-optimized will probably not perform.

OG, SGAM Indeed. The true alpha of successful currency managers is coming from the tactical allocation between carry, momentum and value strategies.

PL, Polar Capital When there is so much change and volatility, with so much information available, we learn lessons very quickly compared with normal times. It’s just that we always wish we’d learned them before it happened.

RO, Oanda Aren’t we too conservative about predicting the future? A year ago no one predicted where we are today. I am seriously worried that governments/central banks will go bankrupt on a massive scale, not because they want to, but because investors simply stand back and say: ‘Oops, we do not want to go along.’

EP, UBS In addition there’s plenty of additional currency volatility in store and I’m not convinced our FX market infrastructure has been adequately stress-tested. The risk of a major settlement failure is still too high, in spite of the beneficial advances made thus far by CLS.

CKG, Société Générale  We’ve still to see some more issues coming out of the Bric economies. There has been too much hot capital going into those markets that keeps thinking this is the bottom.

RO, Oanda Property prices in India and other emerging countries are very high and when they come down this will have huge economic implications.

PL, Polar Capital I predict interest rates will end up at zero practically everywhere, that banks end up nationalized practically everywhere, that economies become more like in the 1970s, with bigger governments. I wouldn’t be surprised to see more than just the banks renationalized. I think you could see whole swathes of industry renationalized or directly supported by governments.

RO, Oanda There is one set of players whose balance sheets are superb and that is the Googles and Microsofts of the world. Shouldn’t they be the next governments that bring their money to the table to pull the cart out of the dirt?

PL, Polar Capital Money disappears very quickly in this kind of environment. Look at Russian reserves and how quickly we can get through those. Piles of cash can be eaten through much more quickly than you can imagine.

RO, Oanda I agree but they have a monopoly over the consumer, so they have a good control over the consumer and a vested interest to keep the consumer afloat.

PL, Polar Capital If we take Google as an example, in the environment we’re likely to see you don’t want your main source of revenue to be advertising, one of the first things you would cut. There are the changes already in the auto sector. The number of trucks sold by a well-known truck producer is jaw-dropping: it’s not falling by 15%, it’s falling by 98%.

CKG, Société Générale  Anecdotally, I heard Aston Martin sold 133 of its cars in the UK in September 2007, and in the same month of 2008 it was just three!

PL, Polar Capital Mortgage lending in the UK fell to 2% of its total a year ago. Don’t underestimate the extent things will be different.

MC, Aberdeen AM In the 1930s, industrial production fell by 80%, so there is a way to go if you want to get really gloomy. We’re going to see a world of capitalism minus, with significantly more government intervention, leading to a globally lower trend rate of growth.

CKG, Société Générale Socialism–lite is what I would prefer to call it rather than capitalism-minus.

PL, Polar Capital We’re all Keynesians again.

MC, Aberdeen AM Yes. We have gone through an unprecedented period of global growth and we will probably have a long period of instability. Fiscally things will become a lot more interesting, generating quarterly spikes in growth followed by equally large dips.

CC, SSgA  If interest rates are going to zero and every government will be more involved in the financial and industrial sectors, what does that mean for FX as a relative asset class?

MC, Aberdeen AM It is uncertain, and once you get past the period of deleveraging they’ll drop.

RO, Oanda There will be huge moves.

NS, Deutsche Bank That uncertainty will lead to more volatility than now. Next year, we will be talking about liquidity and best execution services, and potentially about dispute resolution clauses.

CKG, Société Générale  If all countries trend towards zero inflation and zero rates, and we still feel that we can describe currency moves as a consequence of some multi-factor model, what will the remaining key factors be? Arguably, we could converge on things like current account deficits and fiscal positions. This would suggest that traditional macro investing could return to the forefront. We will still see economic trades between countries in the developed and developing markets, but macro trading among a broader G20 group could replace a lot of the more esoteric trading we have come to see as normal. Will we want to see our capital exposed to countries like Iceland? Or will we want to ensure the preservation of our capital? We may see a rotation away from emerging or developing markets towards more developed markets where liquidity is also deeper. Corporates will be challenged to hedge aggressively their residual exposures. We come back to our belief that the foreign exchange outlook is still positive.

OG, SGAM  Inevitably there will be conflicts between governments with respect to competition, trade or exchange rate policies. In a global deflationary environment, the risk of beggar-thy-neighbour policies is much higher since the cake is becoming smaller.

EP, UBS The continuing volatility could become so unpalatable to governments that we start to see capital controls introduced. That, combined with the settlement risk we live with every day in FX, could create an exciting opportunity. Perhaps we will see the creation of a market for CFDs and NDFs on major currencies that allows the buy and sell side to manage exchange rate volatility without the accompanying, often unnecessary, risk of failed settlements.

PL, Polar Capital One reason why fixed exchange rate regimes came in the first place was because we had so much instability in exchange rates and it was a way of controlling the system. I wouldn’t advocate fixed exchange-rate regimes, but because of lower liquidity, greater volatility, rising unemployment and the tendency to want to impose trade barriers we could easily go in that direction. It would be a mistake, but don’t underestimate how different things could end up looking.

NS, Deutsche Bank Transparency is key in this business. Our volumes and our revenues have grown on the basis of transparency and ease of execution. Any hurdle to that will be detrimental.

OG, SGAM What could prevent the return to fixed exchange rates? You would need to decide at which level you fix each currency. I doubt that a wide agreement could be reached since each country would like its exchange rate to be fixed at an ultra-competitive level. Of course, this is not a major problem if you just need to fix the exchange rate of Iceland against the euro. But it is excessively conflictual in the case of larger economies.

RO, Oanda All the central banks are too dependent on external funding to be able to impose a fixed exchange rate regime. Governments are desperate, because they have to fund huge deficits. Governments do not have the power to impose fixed exchange rates. The best that central banks can do is to dynamically intervene in the currency markets, just for the short term trying to smooth the most extreme price spikes to prevent the occurrence of a cascade of margin calls, which could bring about dramatic realignments of currency markets.