If you had slept through 2008/2009 you would truly wonder what that financial markets hysteria was all about – In the world of FX, it’s as if the credit crisis never happened. At least that is the impression one gets by taking a first glance at the recently released data from the Bank of International Settlements (BIS) in Basel, Switzerland. The growth of the foreign exchange appears relentless reaching a mind boggling $4 trillion in average daily turnover in April 2010. Here are a few of the highlights of the BIS report:
• Global foreign exchange market turnover was 20% higher in April 2010 than in April 2007, with average daily turnover of $4.0 trillion compared to $3.3 trillion.
• The increase was driven by the 48% growth in turnover of spot transactions, which represent 37% of foreign exchange market turnover. Spot turnover rose to $1.5 trillion in April 2010 from $1.0 trillion in April 2007.
• The increase in turnover of other foreign exchange instruments was more modest at 7%, with average daily turnover of $2.5 trillion in April 2010. Turnover in outright forwards and currency swaps grew strongly. Turnover in foreign exchange swaps was flat relative to the previous survey, while trading in currency options decreased.
• Foreign exchange market activity became more global, with cross-border transactions representing 65% of trading activity in April 2010, while local transactions account for 35%.
• The percentage share of the US dollar has continued its slow decline witnessed since the April 2001 survey, while the euro and the Japanese yen gained relative to April 2007. Among the 10 most actively traded currencies, the Australian and Canadian dollars both increased market share, while the pound sterling and the Swiss franc lost ground. The market share of emerging market currencies increased, with the biggest gains for the Turkish lira and the Korean won.
• The relative ranking of foreign exchange trading centres has changed slightly from the previous survey. Banks located in the United Kingdom accounted for 36.7%, against 34.6% in 2007, of all foreign exchange market turnover, followed by the United States (18%), Japan (6%), Singapore (5%), Switzerland (5%), Hong Kong SAR (5%) and Australia (4%).
There will be plenty of discussions and opinions as the full BIS report is going to be analyzed in the coming weeks. For now, we would like to focus on just two sets of data: The distribution and ranking of currency pairs as well as the geographical distribution i.e. where most of the FX trading takes place.
| 1. Global foreign exchange market turnover by currency pair |
| Daily averages in April, in billions of US dollars and percentages |
| Currency pair |
1998 |
2001 |
2004 |
2007 |
2010 |
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| Amount | % | Amount | % | Amount | % | Amount | % | Amount | % | |
| USD/EUR | . | . | 372 | 30 | 541 | 28 | 892 | 27 | 1,101 | 28 |
| USD/JPY | 292 | 19 | 250 | 20 | 328 | 17 | 438 | 13 | 568 | 14 |
| USD/Oth | 140 | 9 | 152 | 12 | 251 | 13 | 498 | 15 | 445 | 11 |
| USD/GBP | 122 | 8 | 129 | 10 | 259 | 13 | 384 | 12 | 360 | 9 |
| USD/AUD | 44 | 3 | 51 | 4 | 107 | 6 | 185 | 6 | 249 | 6 |
| USD/CAD | 52 | 3 | 54 | 4 | 77 | 4 | 126 | 4 | 182 | 5 |
| USD/CHF | 82 | 5 | 59 | 5 | 83 | 4 | 151 | 5 | 168 | 4 |
| EUR/JPY | . | . | 36 | 3 | 61 | 3 | 86 | 3 | 111 | 3 |
| EUR/GBP | . | . | 27 | 2 | 47 | 2 | 69 | 2 | 109 | 3 |
| EUR/Oth | . | . | 17 | 1 | 35 | 2 | 83 | 2 | 102 | 3 |
| USD/HKD² | 14 | 1 | 19 | 2 | 19 | 1 | 51 | 2 | 85 | 2 |
| EUR/CHF | . | . | 13 | 1 | 30 | 2 | 62 | 2 | 72 | 2 |
| USD/KRW² | 2 | 0 | 8 | 1 | 16 | 1 | 25 | 1 | 58 | 1 |
| JPY/Oth | 9 | 1 | 4 | 0 | 11 | 1 | 43 | 1 | 49 | 1 |
| USD/SEK³ | 3 | 0 | 6 | 0 | 7 | 0 | 57 | 2 | 45 | 1 |
| USD/INR² | 1 | 0 | 3 | 0 | 5 | 0 | 17 | 1 | 36 | 1 |
| EUR/SEK³ | . | . | 3 | 0 | 3 | 0 | 24 | 1 | 35 | 1 |
| USD/CNY² | 0 | 0 | . | . | 1 | 0 | 9 | 0 | 31 | 1 |
| USD/BRL² | 3 | 0 | 5 | 0 | 3 | 0 | 5 | 0 | 26 | 1 |
| USD/ZAR² | 6 | 0 | 7 | 1 | 6 | 0 | 7 | 0 | 24 | 1 |
| JPY/AUD² | 1 | 0 | 1 | 0 | 3 | 0 | 6 | 0 | 24 | 1 |
| EUR/CAD | . | . | 1 | 0 | 2 | 0 | 7 | 0 | 14 | 0 |
| EUR/AUD | . | . | 1 | 0 | 4 | 0 | 9 | 0 | 12 | 0 |
| JPY/NZD² | 0 | 0 | 0 | 0 | 0 | 0 | 0 | 0 | 4 | 0 |
| Other pairs | 30 | 2 | 23 | 2 | 36 | 2 | 90 | 3 | 72 | 2 |
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1 Adjusted for local and cross-border inter-dealer double-counting (ie "net-net" basis). 2 Included as main currency pair from 2010. For more details on the set of currency pairs covered by the 2010 survey, see the statistical notes in Section IV. 3 Included as main currency pair from 2007. 4 OthEMS/OthEMS: the data cover local home currency trading only. Source: Bank of International Settlements |
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As before, the top spot went to the US Dollar/Euro currency pair reaching over $1 trillion each day in 2010. It is indeed remarkable to see that the second spot made by Dollar versus Japanese Yen is only half of the USD/EUR volume. Despite the recent flight towards safety, pushing the Japanese Yen to a 15 year high against the US Dollar, this currency pair has lost considerable comparative market share towards other currency pairs. Overall, the US Dollar is still the Alpha Dog among the currencies with over 42% of all trading worldwide, followed by the Euro with just under 20%. The chart below is a nice depiction of the distribution of currency pairs since 2001. Not surprisingly, some of the emerging market currencies have graduated onto the world stage, a trend which is bound to continue and more likely to accelerate.
| 2. Geographical Distribution of Global Foreign Exchange Market Turnover |
| Daily averages in April as Percentages of Global Turnover |
| Country | 1998 | 2001 | 2004 | 2007 | 2010 |
| United Kingdom | 35.8 | 35.2 | 42.3 | 44.0 | 45.8 |
| United States | 17.0 | 17.1 | 23.8 | 24.2 | 23.8 |
| France | 11.8 | 9.6 | 11.4 | 8.1 | 7.2 |
| Japan | 9.2 | 2.3 | 2.3 | 3.5 | 3.3 |
| Switzerland | 1.7 | 1.4 | 0.9 | 2.8 | 2.9 |
| Singapore | 1.6 | 0.5 | 0.6 | 2.6 | 2.9 |
| Netherlands | 1.0 | 3.6 | 1.4 | 1.2 | 2.3 |
| Germany | 8.5 | 13.9 | 3.2 | 4.2 | 1.8 |
| Canada | 1.9 | 1.5 | 0.9 | 0.9 | 1.5 |
| Australia | 0.8 | 1.5 | 1.0 | 1.0 | 1.5 |
| Spain | 0.8 | 3.0 | 0.9 | 0.8 | 1.1 |
| Italy | 1.2 | 3.5 | 2.8 | 1.4 | 1.0 |
| Hong Kong SAR | 0.7 | 0.4 | 0.8 | 0.8 | 0.7 |
| Sweden | 1.0 | 0.5 | 0.6 | 0.6 | 0.7 |
| Denmark | 1.2 | 0.9 | 0.8 | 0.5 | 0.6 |
| Norway | 0.8 | 0.4 | 0.4 | 0.3 | 0.4 |
| Korea | 0.0 | 0.0 | 0.1 | 0.2 | 0.4 |
| Belgium | 1.4 | 2.1 | 2.3 | 1.0 | 0.4 |
| Brazil | … | 0.0 | 0.1 | 0.0 | 0.3 |
| Ireland | 0.5 | 0.9 | 0.9 | 0.3 | 0.3 |
In terms of the geographical distribution, it is also fascinating to see how the number one place, the United Kingdom with the majority of trading arising from within the City of London, has managed to outpace everyone else including the US. London still hosts the largest number of international banks of any place in the world so the data is somewhat skewed in a sense of looking at the pure country distribution. For instance, most of the big German banks channel their investment banking and trading operations from within London. Nevertheless, London is still the most desirable place to be situated merely by the fact that it is in the sweet spot (time-wise) of the 24 hour Forex market. As far as the US is concerned, the impending implemention of the The Dodd-Frank Bill and the US Consumer Protection Act make it all the more likely that the US will not be able to catch up with other locations when it comes to the derivatives portion of the Foreign Exchange turnover. While the UK has also implemented a number of new rules towards tighter market supervision by giving the Bank of England much more regulatory powers over all financial institutions, the UK is more likely to leave the traditional foreign exchange market functioning the way it has been. However, in line with the trend of the rapid growth of transactions in emerging market currencies, we will most likely see the bulk of the ongoing growth in emerging market locations as well. Too bad we have to wait another three years to see the next BIS report.
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