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March 1, 2013

Happy Days Are Here Again

Current Upward Volume Trajectory Points to a Better Year

By Gregg Wirth

Across the globe, foreign exchange desks are partying like it's...well, any year but last year.

Traders talk of daily volume increases of 50 percent over this time last year at some institutional desks, and at least double-digit percentage gains being enjoyed by all. "They are saying there hasn't been a month like this in years!" said Jeremy Boulton, an analyst for Reuters FX Buzz.

Electronic FX trading platform EBS, which is owned by interdealer broker ICAP, reported a 22 percent increase in January's average daily volume on its platform, to $141.3 billion, compared with the previous year's January volume of $116 billion.

In fact, EBS's January volume number was higher than any single monthly number through all of last year. Thomson Reuters, the other top electronic trading platform, has not yet reported its January volume.

Jeff Feig, Citigroup

The surge-propelled mostly by very robust activity in a weakening Japanese yen and a strengthening euro-has notched up volatility, measured by a gauge of implied volatility of G7 currencies compiled by JPMorgan Chase & Co., and begun to erase memories of the year gone by, when volume was off by double-digit levels.

"Overall volume [in 2012] was generally muted, and Superstorm Sandy disrupted trading in the U.S.," said Jeff Feig, global head of G10 FX at Citigroup. "And that affected volatility and resulted in what I would call an exaggerated downturn in volume."

In global central banks' biannual survey of average daily FX volume, released in late January, the U.S. and the U.K.-the two largest FX trading markets, which account for more than half of global trading volume-showed volume decreases of 19 percent in the U.S. and 7 percent in the U.K. for the month of October 2012, compared with the previous year. Hardest hit were spot trades, the plain-vanilla direct exchange of one currency for another that represent about half of all FX trading transactions, which dropped in average daily volume by about one-third last year in the U.S.

But that, as they say, was then. And now just a few months later, FX trading has come roaring back.

Much of the turnaround this year is being attributed to the decline in the value of the yen, as Japanese Prime Minister Shinzo Abe continues to push the Japanese central bank to spur growth, resulting in a devaluing of the currency. That has sent banks, hedge funds and institutional investors scrambling into the FX market to dump the yen in favor of any other safe-haven currency, such as U.S. dollars and euros.

Indeed, in the October biannual bank surveys, the Japanese central bank reported that daily foreign exchange volume at 19 major Japanese banks had actually climbed 6.3 percent compared with the previous survey in April 2012. "This is likely a trend move," said Citigroup's Feig. "We are seeing that the weakening yen will continue to drive FX activity."