6.6 trillion dollars traded every day, the excess of the currency market

(BFM Bourse) – After declining between 2013 and 2016, daily currency trading volume has accelerated over the past three years, rising from $5.1 billion to $6.6 billion per day. While the dollar retains its status as the reference currency, the share of trade carried out in euros increased slightly over the period.

Dizzy. The world’s largest currency market has seen its daily trading volumes jump 30% in three years to a record $6.59 trillion per day, according to figures released Monday (September 16) by the Bank for Settlements. international organizations, considered the Central Bank of central banks. The institution based in Basel in Switzerland conducts a triannual survey to follow the major movements in this little-known market that is “Forex” (for Foreign currency exchange).

This had, for the first time in twenty years, recorded a 6% drop in currency trading volumes between 2013 and 2016. The rebound observed over the last three years is explained by the numerous news (Brexit , Trump’s election, concerns about the euro zone economy, crisis in certain emerging currencies, etc.) which led to renewed volatility in currencies. Since 2009, these trading volumes have more than quintupled. And over the last three years, this dizzying growth has mainly been driven by transactions in derivatives, with activity developing even faster in transactions on foreign exchange swaps (+34%) than in cash transactions. (+20%).

The “Dollar King”

The three most traded currencies remain the dollar, far ahead of the euro, whose weight has nevertheless increased slightly, and the Japanese yen, which on the contrary has seen its share decline somewhat against the backdrop of a decline in yen/dollar transactions.

“The dollar has retained its status as the dominant currency,” notes the BIS, which specifies that the greenback is present on one side or the other in 88.3% of all trade. On one side or the other because Forex is a market in which so-called convertible currencies (currency pair) are exchanged against each other. Far behind the US dollar, we therefore find the single European currency, used in 32.3% of trade, an increasing market share (31.4% in 2016). The yen, which saw its share decline from 21.6% to 16.8%, completed the podium. Note that, “as in previous reports, the market share of so-called emerging currencies continued to grow to reach 25% of the total volume of trade”.

In terms of “currency pair”, the euro/dollar is well ahead since it concerns one out of four transactions, while the dollar/yen pair saw its share fall to 13%, the absence of volatility on the Japanese currency having pushed investors to turn away from it since 2016.

Decline in the interbank market

Long the preserve of banking institutions, which accounted for nearly 70% of Forex activity in the early 2000s, the foreign exchange market has since opened up to new players, including high-frequency traders who are gradually nibbling shares Steps. Mechanically, the share of exchanges between the fifteen major banks that dominated the market is crumbling and now represents only 38% of transactions between 2016 and 2019, against 42% three years earlier.

Intermediate-sized banks, particularly regional ones, on the other hand gained market share (24%, or 1,600 billion dollars per day). High-frequency traders and hedge funds appropriated 9% of the activity, while companies, which intervene in this market to hedge their exchange risk, accounted for 7% of these colossal volumes.

If high-frequency trading and robots are grabbing market share from the big banks, they are also eating into the market share of individuals. Currency speculation on the part of the latter has indeed fallen by 30% over three years, to 200 billion dollars a day. The rise of cyptocurrencies (bitcoin, ethereum, etc.), which are much more volatile – and therefore attractive to amateur traders – than traditional currencies explains this decline. The central banks, finally, only represent 1% of daily volumes, the main economic powers, in particular China, having not carried out competitive devaluations, the monetary institutions have not entered into a kind of “currency war “as had been the case in the past.

London processes almost one in two operations

In terms of geographical distribution of transactions carried out on Forex, it is the British market that takes the lion’s share since 43% of trade is processed in London, an increase in share compared to 2016 (37%). This gain in market share was recorded in favor of the New York marketplace, which now only handles 16.5% of world trade over the period (-3%). Brexit is no stranger to this transfer of market share, the persistent political uncertainty in the United Kingdom having led to renewed volatility in the pound sterling which has benefited its natural place of quotation, London. Hong Kong, leader in Asia, completes the podium with 7.6% of transactions. Paradoxically given this exacerbated volatility, the pound sterling only comes in fourth position among the most traded currencies (13% of transactions).

The BRI also highlights the jump in trade recorded in mainland China (+87% since 2016) to 136 billion dollars per day (2.1% of total volumes). Paris comes just behind with a share down from 2.8 to 2%.

Quentin Soubranne – ©2022 BFM Bourse

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