Thought I would share this interesting article that aptly summaries the current state of the currency market. Volumes and Volatility are at an all time low. _______________________________________________________________________________
Currency Trading Falls Into Torpor
Dow Jones Business News
by James Ramage, Katie Martin and Josie Cox
Currency-trading volume is shrinking at the fastest pace since the financial crisis, the latest sign of the placid conditions that have frustrated traders in markets around the globe this year.
The amount of money changing hands daily in foreign-exchange markets on average fell about 8% in April compared with the same period a year earlier, to $4.1 trillion, according to a survey by six central banks released Monday. The drop was steepest in North America, where volumes plunged nearly 20%. The survey covered about 80% of global currency trading.
Traders say opportunities to bet on big currency moves are few and far between, as years of sluggish growth and near-zero interest rates in the world's major economies keep some of the most heavily traded exchange rates steady. Many investors remain on the sidelines as they wait for more clarity in the Federal Reserve's timetable for raising interest rates, which is expected to cause major swings in the dollar's value against many currencies. The Fed's policy committee may provide some direction on that when it meets Tuesday and Wednesday.
Banks and hedge funds are feeling the strain from sleepy market conditions. For the 10 largest global investment banks, trading revenue in the fixed-income, currencies and commodities units that comprise foreign-exchange trading plunged 15.7% in the first three months of the year from the year-ago period, according to data from Coalition, a consulting firm. Several large currency-focused funds, including FX Concepts LLC, have shut down in the past year. Investors say it is harder to make money trading currencies now, and even some specialists say they are making fewer bets. At the same time, there is rising concern that the torpor may point to market complacency, which could lead to trading opportunities but also potential losses for investors when currencies start to move again.
"If a manager makes a poor trading decision, it may take a while before he or she is given another chance to make the money back," said Luca Avellini, a partner on the FX desk at JCI Capital Ltd., which manages $105 million in currency investments out of a total of $2.4 billion in assets. "In this sort of environment, for the disciplined manager, the incentives to put positions on [currencies] in the first place are very low." JCI's strategies that draw from larger economic themes have suffered under the lower volatility over the past two months, which has led to taking fewer positions and using less leverage. JCI also has made fewer short-term directional bets, Mr. Avellini said.
The data released Monday were compiled by central banks in the U.S., U.K., Japan, Canada, Australia and Singapore. The central banks take a snapshot of trading each April and October.
In North America, volumes fell to $811.1 billion from just over $1 trillion in April 2013. In the U.K., the biggest foreign-exchange trading hub world-wide, volumes fell 6% to $2.4 trillion.
Foreign-exchange traders and analysts report drab conditions in the once-vibrant currencies market. Most major currencies have barely budged this year, giving investors few viable trades compared with assets such as commodities, which have been buffeted by extreme weather as well as geopolitical tensions. That is a change from April 2013, when the Bank of Japan embarked on an unprecedented bond-buying campaign, sending investors piling into bets against the yen.
The yen is up about 3% against the dollar this year, after tumbling 18% in 2013. In North America, daily trading in the dollar-yen currency pair fell 41% to $68.9 billion in the spot market, according to the central bank survey.
One of the currency market's most popular bets early in the year failed to pan out, leading to a lull in trading as many fund managers exited the market, analysts say. Many funds had bet on a stronger dollar, believing that healthy growth would convince the Federal Reserve to raise interest rates earlier than anticipated. But a harsh winter caused the U.S. economy to contract in the first quarter, reducing the likelihood of a rate increase before 2015. "Hedge funds were positioned for a breakout in the U.S. economy, rising yields and a stronger dollar," said Ian Gordon, currency strategist at Bank of America Merrill Lynch. After the market moved against them, "they're waiting for stronger signals from the Fed" before getting back in, he added.
Reduced trading also has squeezed banks, which have fewer transactions to handle for clients.
"With very little happening in the FX market, there is less flow going through market makers," said Saeed Amen, co- founder of quantitative analysis firm The Thalesians. To be sure, many investors and analysts expect trading to pick up as the Fed nears a rate decision. The central bank hasn't raised rates since 2006, and some traders expect the dollar to rise against many currencies once the Fed signals it is preparing to do so.
A strong U.S. jobs report on Friday could shake up the currency market, as improving labor conditions could convince the Fed to raise rates sooner than expected, said Ray Humphrey, a portfolio manager on Canadian accounts at AllianceBernstein LP, which manages $480 billion, including $266 billion in fixed-income assets. "The Fed may need to change their tune," Mr. Humphrey said. "We should see a big pickup in volatility and volumes."
Still, currency volumes are unlikely to pick up substantially until central bank policies diverge more sharply in the U.S., euro zone and Japan. Currently rates are near zero in all three areas, reducing the opportunities to wager on one currency rising or falling against another.
Citigroup Inc., the world's largest currencies-dealing bank, noted in its research Monday that "FX volatility has plummeted" over the last six months, although the bank envisages a pickup from here.
http://www.nasdaq.com/article/currency-trading-falls-into-torpor-20140728-01141
