Boost for Banks as FX Volumes Soar

Terry Flanagan

Like the equities market, foreign exchange volumes have sprung back to life in 2013 with traders expecting volatility to increase as the year progresses.

Sharp declines in the Japanese yen, Swiss franc and U.K. pound have attracted investors back to the market. Added to this, as fears over the eurozone crisis abate, the euro has shifted from its long-held trading range against the U.S. dollar and surged against previous safe havens such as the Swiss franc and U.K. pound—thus creating increased this volatility in the FX markets.

And the move by Japan, the world’s third largest economy, to make clear its intentions to devalue its currency—causing the U.S. dollar and euro to surge against the yen—is spurring talk of a global ‘currency war’ as countries plot a process of competitive depreciation.

“The first month of 2013 has been characterized by its ongoing, and increasing, currency volatility—and this turmoil is likely to ramp up throughout the year as more and more countries are likely to adopt a ‘beggar thy neighbor’ policy and move, openly or not, to devalue their currencies in a bid to strengthen their own exports,” said Nigel Green, chief executive of deVere Group, a financial consultancy.

“The indicators of a forthcoming currency war? There are many, but to highlight just two: the new Japanese prime minister, Shinzo Abe, effectively committing to a policy of devaluing the yen will be of significant concern for the likes of the U.S., China and India, amongst others, as it will give Japanese exporters an enormous trade advantage, and it may prompt these other financial powerhouses to seek their own devaluations.

“And in Europe, Britain’s dismal growth figures have damaged the pound’s ‘safe haven’ status and prompted investors to buy euros, slashing the value of sterling.”

The ‘risk on, risk off’ mentality of 2012—which made it harder to make a profit in the FX market last year as currency trading volumes declined for the first time since the onset of the financial crisis—seems to have been broken with the world’s most important currencies breaking out of the tight ranges of last year.

“We have weathered the muted foreign exchange markets in 2012,” said Drew Niv, president and chief executive of FXCM, a U.S. foreign exchange agency broker. “While still early, 2013 has started strong.”

Banks, though, are the major beneficiaries in all of this as the dislodgment in exchange rates means that more market participants are forced to enter and exit the market in a bid to hedge or cover rapidly changing positions. Barclays, for instance, said it had recorded two of its three highest trading days on record in January, while Deutsche Bank says forex volumes continue to hit record highs.

“With volatility set to dominate the non-stop foreign exchange market, the largest and most liquid financial market in the world, now is the time to review investments,” said Green at deVere Group.

“Perhaps, now more than ever, you must ensure your portfolio is a balanced one—now is not the time to put all your investment eggs in the basket of one country or asset.”

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