The FX market evolves slowly
I’m puzzled by the tack that the WSJ is taking in describing the latest triennial BIS report on FX trading. (Incidentally, neither the WSJ nor the FT actually bothers to link to it, while the NYT/Dealbook doesn’t seem to have covered it at all.)
In any case, the WSJ headline talks about how investors are looking to “growing economies”, and the story says this:
Currency trading volume around the world has hit $4 trillion a day, fueled by investors in the wealthiest nations looking to diversify beyond their home markets in a time of economic turmoil…
With the big developed economies of the U.S., Europe and Japan struggling, investors are turning toward other markets for returns and generating more foreign-exchange trading in the process.
The survey showed how investors are seeking out faster-growing economies and big commodity producers. Trading volume between the U.S. dollar and the Australian dollar rose 35% from 2007, and volume with the Canadian dollar was up 44%. Trading also jumped in the Indian rupee, Chinese yuan and Brazilian real. In contrast, trading in the U.S. dollar against the British pound, a mainstay of the currency markets, fell 6%.
The trend is clear, right? Historically, the FX market has been dominated by the G3 currencies, plus maybe the pound. But the pound has been in decline for a while, and now the other three are shrinking too.
Except, that’s not what the data actually show. If you add up the numbers in the report, trading in the dollar, euro, yen and pound accounted for 155% of FX trade in 2007. (Totals add up to 200% because there are two currencies in every trade.) In 2010, trading in those four currencies actually rose, to 156% of a significantly higher volume. Sure, there were increases in the currencies the WSJ mentions, but they were offset by decreases (in percentage terms, if not in overall volume) in currencies like the Hong Kong dollar, the New Zealand dollar, and the South African rand.
Meanwhile, the euro is accounting for a greater share of FX trading than ever, at 39.1%. That’s a jump of 2.1 percentage points over 2007, and an increase of 8.6 percentage points over the share of currency trading that the Deutschmark accounted for in 1998. The eurozone might not be very impressive as a growing economy, but it’s definitely accounting for an increased proportion of FX trades.
The big news in the report is the rise of the hedge funds and other “nondealers”, which now account for half of all trading in currencies. FX has been an asset class for a while, and it’s becoming an increasingly important one as the stock market continues to move sideways dangerously. The increase in hedge-fund interest in currencies mirrors the rise in hedge-fund volumes in the Treasury market, and it’s probably a good thing: there’s no particular reason why FX trading should be overwhelmingly dominated by large commercial banks, given that actual trade and commerce flows account for such a minuscule proportion of the market.
Certainly the BRICs are going to see their tiny share of the FX market rise over time, while the Nordic countries are going to see their share fall. But none of the BRICs currently account for even 1% of global FX trading (which of course is 0.5% if you try to account for the double-counting.) Meanwhile, the Swedish krona is still 2.2%, and the Norwegian krone is 1.3%. The currency markets change much more slowly than global stock markets do.