Although optimism remains high that the FX market can continue its overall strong performance of recent years, a few doubts are starting to creep in. Much has been made of the acceptance of FX as an asset class. However, the same was once said of the sub-prime mortgage sector, and nobody needs to be reminded how fallacious that was.
The huge losses being reported by corporates from emerging markets around the world suggest that not all is as rosy in FX as might have been reported. Fears this will make it, as one senior figure shuddered recently, the next sub-prime are possibly far fetched. But there will be recriminations. As a trader from one sell-side participant in London asked after reports that Hong Kong-based Citic Pacific had blown close to $2 billion in option trades: "And who were the main banks behind the Citic trades? Looks like Ashanti all over again." The fall-out from the Ashanti Goldfields debacle lasted years, and many corporates, particularly from the mining sector, ceased using derivatives as a result. Let’s hope history does not repeat itself.