The atmosphere at a conference was markedly different from previous years: there was a lot of buzz.
The atmosphere at a conference of foreign exchange professionals was markedly different from previous years: there was a lot of buzz.
Senior executives from banks and brokers were optimistic about the prospects for forex trading at the recent meeting in Amsterdam. Years have passed enviously watching the world of cryptocurrencies as digital assets thrived in a highly volatile market, while traditional money remained dull.
Currencies are now at the forefront of the action. Rapidly rising interest rate risks around the world and heightened geopolitical tensions are fueling a 30% surge in trade and historic moves, reviving an industry that spent the last decade struggling with stagnant volumes.
“FX as an asset class is really back this year,” said Russell LaScala, global head of FX at Deutsche Bank AG, the world’s largest foreign exchange player by market share. “I think last year a lot of macro hedge funds were trading different assets, including crypto.”
The notoriously wild swings in the crypto markets have subsided this year, with the Bitcoin volatility index shedding more than 50% since a peak in May. By contrast, currency volatility gauges from Deutsche Bank and JPMorgan Chase & Co. are at their highest in a decade, apart from a spike when the pandemic hit.
And the moves have been shocking: In Japan, authorities sold dollars to prop up the yen for the first time since 1998, while the euro sank below parity with the dollar to a 20-year low. In London, the world’s leading currency trading hub, the pound fell to an all-time low.
“Volatility is a bit like a London bus: either there is none for love or money, or three arrive at the same time,” said Kit Juckes, global head of currency strategy at Societe Generale SA.
Forex traders enjoy volatile markets after years of stagnation
The stock has attracted speculative players like macro hedge funds and caught the eye of real-money investors, whose portfolio valuations are now subject to sudden swings. The war in Ukraine and the Fed’s aggressive rate hikes intensified the moves, drawing money into the safe-haven dollar and influencing other markets, from Bitcoin to stocks.
“FX has become a much more important focus, even for investors who don’t normally focus on FX for two main reasons: the dollar has been the only effective hedge left in the markets and the appreciation of the dollar has been very tradable. for speculative investors,” Ebrahim said. Rahbari, global head of currency content and analysis at Citigroup Inc.
At TradeTechFX, the conference in Amsterdam, executives packed sessions with titles like “How can you prepare your FX desk for increased volatility?” before taking the floor at afterparties fueled by espresso martinis.
Crypto players, following debates over whether progress in building an institutional ecosystem has been “hindered by ‘winter,’” seemed somber, muttering in corners. Bitcoin has been stuck around $20,000 for months in a crash from last year’s peak near $70,000.
Crypto loans now pay less than the most secure US government debt.
“Cryptocurrencies seemed to be having fun until central banks started breaking things,” said Tanvir Sandhu, chief global derivatives strategist at Bloomberg Intelligence. “Inflation was needed to end the secular decline in currency volatility as central banks unleashed years of repression. Volatility creates opportunity and is a trader’s best friend.”
In fact, cryptocurrencies control only a fraction of the volumes of the forex markets, despite all the attention they generate. Fiat currency transactions record about $6.6 trillion each day, according to the Bank for International Settlements. That compares to just under $1 trillion for Bitcoin and other tokens, according to data website CoinMarketcap.
Markets are now likely to be migrating to a higher range for interest rates and bond yields and that will be accompanied by higher currency volatility on average, Societe Generale’s Juckes said.
This is a boon for the companies that dominate the space. Trading activity on major exchanges has soared compared to last year, while profits at the largest foreign exchange trading banks are at multi-year highs.
EBS Market, a platform owned by CME Group Inc., saw a 30% increase in spot trading in September compared to a year ago, with futures trading at a record level. Spot volumes reached $76 billion, the highest level since the pandemic hit in March 2020. Other major platforms have also enjoyed a boost, with Euronext FX seeing a 20% increase in August, according to the Liquidity Finder website.
Good business
Not everything has been a bed of roses. Liquidity has still been a challenge at times, said Citigroup’s Rahbari.
“There have been times when large asset price movements were seen with relatively little flow, similar to patterns in other markets this year,” he said.
Overall, however, the increased volatility has benefited Deutsche Bank, UBS Group AG and JPMorgan, the top three banks by market share. They control 30% of the market, according to an annual survey of forex trading banks by Euromoney.
JPMorgan posted a 15% rise in its fixed income markets business in the second quarter. UBS highlighted the exchange rate as a driver of revenue that rose 19% in its global markets division. For its part, Deutsche Bank’s fixed income and foreign exchange grew 32%, the best second quarter in a decade.
“I’ve been doing this for a long time and when you get to markets that are volatile, but not disorderly, client activity increases and that’s usually good for business,” LaScala said.
