FX Volumes high, liquidity shallow

As mentioned in FX market: Boom and bust?, all looks relatively healthy in FX. And figures from the CME and EBS, probably the market’s two largest non-bank execution venues, fully support this view. Both report that September was a record month.

The CME says that its average daily volume reached $110 billion, an increase of 22.3% over August. While the figures were distorted to an extent by the calendar roll, this was an increase of 54.1% over September 2007. Even accounting for a valuation effect, the rise in volume is extremely impressive. Also of interest is the fact that the CME reports that activity in its cable contracts rose 14%; this is relevant because cable appears to be the major which is suffering the most from a widening of spreads and more shallow liquidity in the OTC market. If only Reuters dared to publish its figures, this number could be put into context. Unfortunately it doesn’t; its reticence is baffling for a supposedly global information company.

Meanwhile, Icap says that the average daily volumes on EBS reached $274.2 billion, a yearly increase of 43%. Average daily turnover to September 30 totalled $219.2 billion, an annualized increase of 31%.

But behind the numbers, market participants are worried by the fact that prices are gapping to an extent they haven’t for years. Also, FX has not been immune to the fallout from other markets. The dollar’s impressive performance over the past few sessions has been attributed to many factors but for the moment nobody seems sure whether the downtrend is over. Perhaps the biggest worry is that the demand is being driven by funding issues. “The USD has remained in demand as the market searches for USD liquidity,” says BNP Paribas. “Despite the USD swap facility running at a record $620 billion, USD spreads have continued to widen. Over the past few days, Asian and other EMK-related central banks have been seen creating USD liquidity either by selling USD-denominated assets or monetizing currency reserves... But unlike May/June when there was a wave of USD-denominated agency selling, the current fire sale of USD assets does not mean USD weakness. USD asset selling can be interpreted as an indicator for USD liquidity shortage.” Only time will tell whether those dollars bought for short-term funding will be dumped on the market.