Does this reflect less interest in trading currencies? Perhaps not. CFTC data for IMMs show that average open interest (notional US dollar value of open positions) in July was $101.9 billion, compared with $88.3 billion for the same month last year, which suggests that the FX market continues to grow. The drop-off in trading volumes is probably being driven by a decline in volatility, according to analysts at Citi. Measured as an intra-day range or on a close-to-close basis, Citi shows that volatility has declined significantly this year. The bank says this leads to less of a need for “frequent transactors” such as option writers, or hedgers of underlying securities portfolios to make adjustments to their positions.
There is also an interesting contrast between the central bank numbers and the CME’s in relation to the most active currencies traded.
The Federal Reserve Bank of New York’s data showed that USDJPY accounted for 12% of USD trading while the AUDUSD currency pair made up 11% of total volume. The CME data, however, shows that the AUD has a 15% share of its total volume.
Citi’s analysts attribute this to a combination of high interest rates, a high beta, a high correlation with risk appetite and the currency being regarded as a proxy for China.