Bank of England Foreign Exchange Report Shows EURUSD Turnover Falls Sharply

Both London and New York saw a major decline in foreign exchange trading volumes between April and October 2015.

Above: The City of London, the world's largest FX trading centre. A survey reveals turnover in EUR/USD fell 17% in October 2015 to $640 billion per day. Conversely, turnover in AUD/USD rose 8%.

A Bank of England survey of the major financial institutions dealing in foreign exchange, which measures the gargantuan volumes traded in the global currency markets, has shown a 14% drop in trading volumes since April 2015 and a 21% fall from a year ago.

The Bank of England survey, showed that the average daily volume of FX traded in the U.K in October 2015 was a massive 2148bn – or 2.15 trillion dollars – the equivalent of two thirds of the U.K’s annual GDP - in an average day! 

The data showed a considerable drop in flows compared to six months ago, however, which was even higher at 2481bn. 

The majority of transactions were of Foreign Exchange Swaps, which are used by companies to hedge against foreign currency risk in the future, and these accounted for 1019bn of the total.

The biggest fall from April to October was in the Spot FX market, according to the report: 

“Turnover in all products fell over the 6 months to October 2015.

“FX spot turnover fell 24% to $737 billion per day, down 34% on the year.”

In terms of actual currency pairs, the report revealed that EUR/USD had fallen the most:

“Turnover in most currency pairs fell.

“Indeed turnover in EUR/USD fell 17% in October 2015 to $640 billion per day.

“Conversely, turnover in AUD/USD rose 8%, while turnover in USD/CNY continued higher, up 3%.

“USD/CNY is now the 8th largest currency pair.”

Reasons for the Drop in FX Volumes in 2015

The report gave no explanation of why trading volumes had fallen by a fifth in the last year, but Jeremy Stretch of CIBC Capital Markets, was reported by Yahoo Finance as positing increased regulation as a factor.

Indeed, regulation was stepped up in several jurisdictions following the Swiss Franc debacle last January, when the SNB removed the cap on their currency leading to huge loses for many brokers and their clients.

As a result of the SNB move, regulators in the U.S, for example, increased the minimum margin requirements on many institutional FX transactions, which would have led to an immediate fall in volumes since clients would have needed to put up more capital to get the same leveraged volumes compared to previously.

The removal of the Franc’s cap led to many brokers going bankrupt and many traders losing all their trading capital so this too may have had a small if not inconsiderable impact on trading volumes.

Another reason for the fall in FX trading volumes is probably as a result of the appreciation of the dollar, since the volumes are reported in dollars, so a stronger reporting currency would necessarily translate into a reduction in overall volume compared to using another weaker currency to report turnover.

The Dollar Index closed at 86 in October 2014 before rallying higher to 97 in October 2015 an 11-point and 12.8% increase in a year.

Nevertheless, although this goes a long way to explaining the fall in volumes over the year, a rise in the value of the reporting currency cannot explain the 14% fall in volumes since April 2015, since the dollar index barely changed in value between April and October 2015.

However, a view of the charts of several of the most traded currency pairs may explain why volumes dropped.

The BOE’s report says that the most marked falls were in Spot and Options Trading, which fell from 973bn to 737bn between April and October.

Spot Forwards and Options are the favoured tools of speculators, so a looking at price charts might explain why trading volumes reduced so markedly over the period.

If we look at the chart below we can see that in April, average daily volumes would probably have been higher because of traders closing long-term short positions after the euro hit 12-year lows of 1.0462 following a protracted bear market for the currency.

This would explain why there were so much trading activity in April, particularly in Spots.

October on the other want was a much less volatile month and given a sideways market had begun in EUR/USD many speculators would have been put off betting on the currency, thus reducing trading volumes as a consequence.

The same theory could explain why GBP/USD levels also fell in October compared to April – there was a significant short-covering rally in April after a fairly long down-trend.

This would also explain why trading in AUD/USD anomalously rose by 8.0%, since it was still in a volatile down-trend between April and October, which ended in October, and could have resulted in some large short positions being closed out, and ergo higher activity and volume.

The sideways market since April could also account for the reduced trading in hedging instruments such as FX Swaps, since a lack of volatility may have reduced the motive to hedge against risk.

UK Foreign Exchange Market Largest

The U.K continues to lead the world in foreign exchange in terms of trading volumes, with 2148bn in total turnover in October versus the next largest centre New York, which handled 809bn.

The survey, which is carried out in New York, Singapore, Tokyo and Canada as well as in London, also saw trading levels fall in New York, which saw a 286bn reduction from a year ago.

Results from Singapore and Tokyo, however, say volumes rise by just over 5% each, whilst in Canada FX volumes fell by 13%.