UPDATE 2-N.American FX volume up but falls elsewhere in April

by on July 30, 2012 4:16 pm BST

Mon Jul 30, 2012 12:16pm EDT

(Reuters) – Foreign exchange turnover rose
slightly in North America but slipped elsewhere in the world in
early 2012 when compared with the year earlier period, according
to a semiannual survey of major central banks on Mo nday.

The moribund global economy, with the euro zone fiscal
crisis that had been thought confined to peripheral nations now
directly impacting larger economies such as Spain, could be
weighing on trading, analysts said.

Regulatory pressure to rein in bank risk and the low
interest rate environment stemming the so-called carry trade may
also have prompted a drop in volume, analysts said.

“It is central banks and their extraordinary
policies, quantitative easing in the United States and bond
purchases in Europe, that are now the prime movers of currency
rates,” said Joseph Trevisani, chief market strategist at
Worldwide Markets in Woodcliff Lake, New Jersey. “These policies
are by nature unpredictable and more difficult to trade.”

Trevisani added banks have also been under increasing
pressure to rein in risky proprietary trading activities, which
could account for some of the drop in volume.

The zero interest rate environment around the world and
reduced demand for the carry trade may also be weighing on
trading volumes said Boris Schlossberg, managing director of FX
strategy at BK Asset Management in New York.

The trade involves borrowing in a currency with relatively
low borrowing costs in order to invest the proceeds in a
higher-yielding currency.

“I’m not surprised that flows are down from a year ago,”
said Schlossberg. “The global zero interest rate environment is
destroying 90 percent of the carry trade.”

The total North American average daily turnover in foreign
exchange instruments rose slightly in April from a year earlier
to $859.8 billion, according to a survey released on Monday by
the New York Federal Reserve-sponsored Foreign Exchange

That was a 0.5 percent increase from April 2011 but down
from the $977 billion reported in February for October, 2011.

Average daily volume of spot transactions totaled $429.7
billion in April, down 2.4 percent from the year ago period.
Forward transactions totaled $148.99 billion, up 11.2 percent.

Foreign exchange swaps transactions were at $247.8 billion,
down 0.2 percent while over-the-counter options were at $33.4
billion, up 1.0 percent.

The euro against the dollar remained the dominant currency
trade in all four categories, $147.5 billion in spot
transactions, $36.9 billion in outright forwards, $72.5 billion
in swaps, and $6.3 billion in over-the-counter foreign exchange


Data from the Bank of England showed average daily turnover
of spot, outright forwards, non-deliverable forwards, swaps, FX
options and currency swaps totaled $2 trillion in April 2012, 2
percent lower than in October 2011 and 5 percent lower than the
same month last year.

The official data backed up anecdotal evidence from London
foreign exchange traders who reported low volumes and
range-bound trading in the early part of the year.

Spot activity fell 12 percent to $711 billion a day in April
from $804 billion a day six months earlier, while FX options
activity also declined.

The daily turnover in FX swaps rose 8 percent to $957
billion however, recovering from a fall to $882 billion in the
previous survey six months ago.

According to the survey of 30 financial institutions, the
U.S. dollar was the most actively traded currency although its
share dropped to 86.6 percent in the six months to April from
87.7 percent last October.

The euro, the second most actively traded currency, also saw
its share dip to 43.4 percent from 44.9 percent.

Average daily volume in the Tokyo foreign currency market
fell 7.6 percent to $262.8 billion in April from $284.6 billion
a year earlier, based on the annual survey of the major 19
players, the Tokyo Foreign Exchange Committee said.

The fall in trading volume was partly due to a stabilizing
of the yen after it hit an 11-month low the previous month. But
it also reflected reduced currency hedging demand from Japanese
exporters after the yen weakened in mid-March on expectations of
further policy easing by the Bank of Japan, traders said.

The survey also showed it was electronic trading that took a
hit, while the more traditional human-based broking fared
better. The electronic trading between banks fell 17.9 percent
from a year earlier while other forms of trade including
voice-based broking rose 10.2 percent.

Some market players said the introduction by main FX trading
platform EBX of three decimal places for yen trading in March
last year, which some traders found cumbersome, may have been
behind the sharp drop-off in electronic trading.