Tech and Central Bank Support FX Volumes
Foreign exchange volumes have been pouring out during the coronavirus pandemic instead of stalling as they usually do during a crisis. This is in thanks to technological improvements, central bank and government intervention, a central bank panel said on Tuesday.
The turnover for the $6.6 trillion a day FX market is difficult to quantify. But data from some of the world’s top trading and settlement platforms showed volumes hit a record in March. This includes Refinitiv and CLS.
They saw a lot of rebalancing flows, which contributed to a large pickup in volume as volatility increased. This was according to Guy Debelle, chairman of the Global Foreign Exchange Committee. It is a panel that monitors developments in the FX markets. Debelle is also the deputy governor of the Reserve Bank of Australia.
Customer volumes rose by half in March, and inter-dealer volumes more than doubled, said Neill Penney, managing director of Refinitiv.
In comparison to previous crises, the investment the industry has made in automation and risk management has really paid off. That is, in terms of letting the market as a whole continue to function, he added.
In March, volatility has soared to multi-year highs as investors panicked over the impact of coronavirus. This is in an environment where traders had to work from remote locations.
Central Bank Liquidity Lessened Volatility
Akira Hoshino, head of FX at Citi in Tokyo, said the March turnover doubled from February, but that was not unusual. Moreover, forex volatility fell almost as fast as it rose thanks to central bank liquidity.
In 2008, it took more than a year for volatility to drop by half. It was something which has already happened in the three months since March.
A Deutsche Bank FX volatility index is trading below 8%, more than halving from a peak of over 16%.
Hoshino said that the timely and decisive central bank and government action is the key to stop markets collapsing. Without these actions, they may have seen more collapsing markets, but it’s not happening.
The adoption of algorithmic trading in the FX markets rose during the crisis, Refinitiv’s Penney noted.
In aggregate, only 56% of the overall market is electronically traded. However, the share is much higher, like in spot trading, where the market share is nearly 90%. FX forwards and other products are also catching up.
Meanwhile, in forex news, access to USD wholesale funding markets has reopened, which is a good sign. However, the challenge for FX markets this week will be the daily swings in new US COVID-19 cases.
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