The 30 largest banks active in the UK foreign exchange market participated in the survey, which showed that while spot transactions had increased 2% since the last survey, the fall in overall volume was largely driven by a 9% fall in FX swaps activity. However, average daily volumes in currency swaps – comparatively rare longer-term cross currency interest rate swap transactions – grew by a relatively large 27%, reaching a record high of $26 billion, the survey shows.
The fall in FX swap turnover in October, which accounts for more than 40% of all FX activity in London, is unsurprising at a time when concern over counterparty risk among banks was mounting and liquidity in the swaps market diminished. Looking more closely at the data shows FX swaps between banks fell almost 12%. This is likely to have also had the added effect of reducing arbitraging activity in these markets, further contributing to the drop in overall volumes.
As banks froze more of their existing swap lines, the difficulty in accessing dollar funding became more acute, reflected in the widening of the EURUSD three-month cross-currency basis swap. The instrument had already traded as high as -100 basis points in October before reaching a post-Lehman high of -162bp the following month, prompting the world’s central banks to jointly inject liquidity and ease conditions in the dollar-funding market.
The survey also broke down volume by currency pair and showed EURUSD accounted for 35.1% of trading volumes, up from 33.2% in April, followed by GBPUSD at 12.3% and USDJPY at 10.7%. AUDUSD, the fourth most-traded currency pair in London saw the biggest relative rise in trading activity, accounting for 7.9% of turnover, up from 5.7% recorded six months earlier.
Trading volumes in the Japanese yen and Swiss franc – currencies both affected by their respective central bank interventions – fell the most in the October survey. The yen accounted for 13.8% of volumes, down from 15.5% in April, while the Swiss franc accounted for 6.1% of activity, having previously constituted 7.1%.
While London remains the epicentre of the foreign exchange market, with daily turnover more than double that of its nearest rival, New York, the Bank of England’s survey results are in stark contrast to those revealed by the equivalent survey conducted by the New York Federal Reserve Bank. The demand for dollar funding in Europe and the subsequent pressure in the EURUSD FX swaps market, the majority of which would have been conducted out of the UK, goes some way to explain the divergence in activity.
Average daily FX volume in North America during October was estimated at $977 billion, 21% higher than in April. This was primarily down to the 28% rise in spot transactions to $564 billion, though turnover in forwards, FX swaps and OTC options all posted gains in excess of 10%.
Similar semi-annual surveys were also conducted by central banks for Singapore, Canada and Australia.
The Singapore Foreign Exchange Market Committee reported average daily reported volume of FX activity in Singapore was $308 billion in October, 1.1% less than in April.
The Reserve Bank of Australia showed local foreign exchange activity had dropped 23% in October to $167.9 billion, the largest proportional fall out of the five regions surveyed.
In Canada, average daily turnover was recorded at $52.4 billion in October, 14% lower compared with six months earlier. This was first time FX turnover fell in Canada since April 2009.