Japan was overtaken by Singapore in FX trading as far back as 2013. But while the business in Tokyo is less diversified than in other Asian trading hubs, Japan appears pretty relaxed about its capital’s dependence on the yen.
That might be because its share of activity is still going up. The most recent Bank for International Settlements central bank survey found that although Japan had fallen from fourth to fifth in the FX trading rankings, its share of the global FX market increased from 5.6% in 2013 to 6.1% last year.
Coupled with a slight decline in yen trading over the same period, this points to a minor reduction in Tokyo’s dependence on its domestic currency, suggests Celent analyst Brad Bailey. “The bulk of trading out of Tokyo is JPY/USD,” he says. “Even other yen crosses are quite small with some time zone-dependent trading in EUR/JPY, which has seen relatively strong growth this year.”
While Tokyo is by far the largest Asia trading centre for yen, all Asian trading centres rely on yen volumes, it being one of the world’s most heavily traded currencies. Michael Moran, an analyst with Royal Financial in Sydney, observes that while leverage in Japan for retail FX is among the tightest in Asia, the number of Japanese retail FX traders has grown in recent years and the Bank of Japan is keen for Tokyo to retain its status as the centre of excellence for yen trading.
|Tony Shaw, HSBC|
The only Asian market to match Singapore for growth in recent years is Hong Kong, which has managed to stay ahead of its regional rivals for offshore RMB. Most experts are confident that it will retain this position in the medium to long term.
Jerry Li, Greater China head of fixed income and currencies at Deutsche Bank, says the recently launched Bond Connect scheme further strengthens Hong Kong’s position by serving as a key mechanism for global investors to access the China fixed income market as well as onshore USD/CNY FX spot and derivatives hedging.
Hong Kong will continue to be the major centre of trading in RMB in the absence of some major dislocation in trade flows or policy changes driven out of Beijing, according to Bailey.
A bigger question is whether offshore RMB will still exist in the medium to long term, argues Shaw. “We expect to see further convergence of onshore and offshore RMB markets, especially in the CNH and CNY FX space, but the gap will persist until China fully liberalizes its capital accounts which will happen in a few years’ time at the earliest - 2020 is the official forecast,” he says.
Tom Orlik, Bloomberg Intelligence chief Asia economist, reckons the challenge for Hong Kong on the yuan is that as bond and equity markets on China’s mainland open up, the appeal of holding yuan offshore will be reduced. As China opens to portfolio inflows on yuan business, Hong Kong will find itself competing not against Singapore, but rather the gravitational pull of the entire mainland market.
|Andrew Pal, |
“I also see an opportunity for Sydney’s re-emergence as a financial hub, aided by the fact that along with the UK, Australia is set to be the only jurisdiction to make mandatory the FX Global Code of Conduct,” he adds.
Another location with ambitions to climb the FX value chain is Shanghai, where there is understood to be discussion under way between regulatory bodies and the industry regarding the enforceability of close-out netting (where counterparties with a number of obligations to each other can agree to offset and net those obligations).
And having spent the last six months in Shanghai, Pal reckons that neither language nor infrastructure will be a barrier to China’s most populous city becoming a leading FX trading centre.
“English is widely spoken in foreign-facing institutions and the Shanghai Pudong financial centres of Liujiazui [banks and financial institutions] and Century Avenue [futures exchanges] provide office facilities of global standards on a significant scale,” he says.