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February 3, 2014

Here Today, Gone Tomorrow?

Over the past year, the liquidity in emerging currencies grew in fits and starts quarter to quarter. Traders asked FX veterans for their outlook on the next 12 months.

By Rob Daly

Over the past three years, the global foreign exchange market has witnessed dramatic growth in liquidity in a number of leading emerging-market currencies, but is this a temporary anomaly or the new norm?

According to a recent article, "FX and derivatives markets in emerging economies and the internationalization of their currencies," published by Torsten Ehlers, an economist at Bank of International Settlement (BIS), and Frank Packer, head of financial stability and markets for Asia and the Pacific at BIS, in the December 2013 BIS Quarterly Review, it's been a heady time for three currencies. Turnover in the Chinese renminbi, Mexican peso and Brazilian real from 2010 to 2013 increased 249, 171 and 117 percent respectively.

And it has not gone unnoticed. "Thomson Reuters platforms had record trading days in a number of its emerging-market currencies at various points throughout 2013," said James Kwiatkowski, global head of sales for FX at Thomson Reuters. "Emerging-market currencies across the board have been affected; however, trading growth has been seen specifically in Eastern Europe, China and Latin America."

The latest BIS Triennial Bank Survey, published in September, listed the Chinese renminbi and Mexican peso as two of the 10 most traded currencies.

According to BIS numbers, turnover in the Mexican peso in 2013 reached $135 billion, which raised its share in global FX trading to 2.5 percent, Kwiatkowski said. "The Russian ruble also saw a significant increase in market share, making it the 12th most actively traded currency worldwide," he said.



Over the past 12 months, the liquidity in emerging currencies grew in fits and starts quarter to quarter, according to industry observers.

Saxo Bank experienced strong trading conditions in emerging-market currencies compared with previous quarters, according to a bank spokesman who declined to be named for this article. The trend continued until a second-quarter sell-off in May and June reduced liquidity; it rebounded in September, he told Traders.

"Emerging-market trading liquidity becomes worse as volatility increases and vice versa," the Saxo Bank spokesman said.

However, the performance of these currencies did not occur in lockstep during the second half of 2013, said Blu Putnam, chief economist with global exchange-operator CME Group. "Second-quarter depreciation was the norm, and quantitative easing talk from Federal Reserve chairman Ben Bernanke received most of the blame," he said.

Putnam sees the relative stability of the Mexican peso against the increased weakness of the Brazilian real and Indian rupee over the past year proving his point.

"For trading 2013 year-to-date, the high-low range for the Mexican peso against the U.S. dollar has been 12 percent, which is just barely 1 percent higher than the range for the British pound and the Swiss franc against the dollar," he explained. "By sharp contrast, there was a very wide range for the Brazilian real of 26 percent, and for the Indian rupee of almost 30 percent, as these currencies faced much more severe risks and difficulty with long-term challenges."

For Brazil, its government continues to focus on the growing the nation's middle class, which has become an active force for improving government services, Putnam said. "The middle-class protests have come during the infrastructure build for the World Cup and the 2016 Summer Olympics, and the currency markets reflect that considerable policy uncertainty. Its currency weakened to a break in the third quarter of 2013 and resumed the following quarter."