The puzzle of the euro’s shrinking share of the FX market
Reuters Breakingviews is commenting on the latest forex statistics
from the Bank of International Settlements, which show that the euro’s
share has shrunk to its lowest level since 1999. Swaha Pattanaik, the
author of the article, admits openly that this is a puzzle. The euro’s
share in spot and derivatives trading has fallen to 33%, down by a
seventh since 2010, and reversing all the gains made during the last
decade. The gainers were the yen and the dollar, the latter with a
share now of 87% (note that shares do not add up to 100% as there are
always two currencies involved in a transaction). The article makes a
number of guesses. One possibility is that most of the institutional
investors are based in the US and trade currencies against the dollar,
not the euro. (But is this new?) Another factor may have been
Switzerland’s cap on the franc’s exchange rate. And the euro is
clearly not a funding currency for carry trades either. (Again, this
is not new either?)
-- EuroIntelligence e-mail
http://www.ubs.wallst.com/ubs/mkt_story ... -1&first=0
8:01 AM ET September 06, 2013
BREAKINGVIEWS-Euro's shrinking FX market share is a puzzle
10:54 am -- (The author is a Reuters Breakingviews columnist. The
opinions expressed are her own.)
By Swaha Pattanaik
LONDON, Sept 5 (Reuters Breakingviews) - The amount of money coursing
through the foreign exchanges each day now surpasses the combined
annual economic output of Britain and France. But the euro's share of
this $5.3 trillion market has shrunk to its lowest since the currency
came into existence in 1999, according to the Bank for International
Settlements (BIS). It's a puzzle.
While its turnover grew in absolute terms, the euro's share of all
spot and derivatives currency fell to 33 percent, down a seventh from
2010 and reversing all the ground made in the past decade. Since two
currencies are involved in each trade, the sum of the market shares is
200 percent.
The euro's loss was the yen's and dollar's gain. Yen trading leapt as
markets anticipated the sea-change in Japanese monetary policy in
April, the month the data was collected. That helped lift the yen's
market share by a fifth to 23 percent. In contrast, traders had a less
clear-cut story to trade in the euro.
The dollar's share held up, rising a couple of percentage points to 87
percent. It may have something to do with the fact that so many
institutional investors, hedge funds and proprietary trading firms are
based in the United States and tend to trade currencies against the
dollar rather than the euro. Turnover fell or stagnated in most euro
zone countries but grew in the United States.
The rise of the Chinese renminbi and Mexican peso, which entered the
list of the 10 most traded currencies, also favours the dollar,
against which they are most widely traded.
Policy may have played a part. Switzerland's cap on the franc's
exchange rate against the euro depressed its trading. And anyone
funding carry trades was unlikely to use the euro since U.S., Japanese
and British interest rates were lower than the euro zone's in April.
It's unclear whether these factors fully explain the drop in the
euro's market share. And trends can't be extrapolated from a snapshot
survey. But these trading shifts matter to those who hire and fire
traders and decide which FX businesses to grow.
CONTEXT NEWS
- Daily turnover in the foreign exchange market averaged $5.3
trillion a day in April 2013, up from $4.0 trillion three years
earlier, according to the Bank for International Settlement's
triennial survey published on Sept. 5.
- The foreign exchange survey has been conducted every three years
since 1989. Central banks and other authorities from 53
jurisdictions took part in the 2013 survey, collecting data from
about 1,300 banks and other dealers.
- Reuters: BIS 2013 survey of global forex trade
- Reuters: Global FX trade jumps more than a third in 3 years to
$5.3 trln a day -BIS
(Editing by Chris Hughes and Sarah Bailey)