The New Normal Is Terrible For Forex Traders

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Nov. 23 (Bloomberg) — The world’s largest currency traders say foreign-exchange revenue is sliding as central-bank policies stifle price swings and cut volumes by $300 billion a day.Deutsche Bank AG, the biggest dealer based on Euromoney Institutional Investor Plc data, says narrower margins cut revenue “significantly” last quarter. Barclays Plc, the third- largest, says foreign-exchange sales are dropping and fourth- placed UBS AG says it has been hurt by lower volatility. Daily turnover as measured by CLS Bank, operator of the largest currency-transaction settlement system, slid 6 per cent to $4.72 trillion in the third quarter from the year-earlier period.

The combination of interest rates at, or near, record lows in the U.S., Europe and Japan is diminishing the allure of the dollar, euro and yen, the three most-traded currencies. From Switzerland to Brazil, central banks are establishing controls on exchange rates, making it less lucrative to trade the franc to the real.

“With interest rates being at zero it’s very difficult now to play the cyclical differences in economies,” David Bloom, global head of currency-market strategy at HSBC Holdings Plc in London, said in a telephone interview on Nov. 20. “We’re in a structural world where if you have an economic event, you are best placed to think about it in terms of equities or bonds rather than foreign exchange.”


Virtually Zero

The European Central Bank cut its benchmark interest rate to 0.75 per cent in July and the Federal Reserve’s target rate for overnight lending between banks has been at virtually zero since December 2008. The ECB also said on Sept. 6 it would spend as much money as needed to restore confidence in bond markets, while the Fed has pledged to continue stimulus efforts until the economy improves.

That’s offering speculators little incentive to use differences in borrowing costs as a reason to bet on the euro against the dollar, the most-traded currency pair based on data from the Basel, Switzerland-based Bank for International Settlements. The euro has traded in a range of 3.21 U.S. cents this month, after a band of 3.36 cents in October. That’s the tightest on a monthly basis since July 2007, when the range was 3.23 cents.

The 17-nation currency strengthened 0.2 per cent to $1.2904 at 7:50 a.m. London time. It was little changed at 106.24 yen.


Implied Volatility

One-year implied volatility for the euro versus the dollar, a gauge of future price swings, slipped below 9 per cent on Nov. 20, the lowest since February 2008. JPMorgan Chase & Co.’s G7 Volatility Index declined to the least since 2007 the same day.

“The foreign-exchange business is a raw function of volatility,” said Mike Bagguley, global head of foreign exchange at Barclays in London. “Market volatility is down and volumes are down, which is never good.” Interest rates at zero mean markets are determined more by the availability of liquidity than fundamentals, he said.

Central banks from Australia to Sweden are also cutting interest rates as global growth slows, cramping opportunities to obtain funds in a country with low borrowing costs and invest in those nations with higher interest rates, the so-called carry trade. The UBS V24 Carry Index, which tracks returns based on 24 currencies, fell to 425.35 yesterday, the lowest this year. It’s down 7.7 per cent from a 2012 high of 461.01 on Feb. 29.

“Investors are cutting back on their exposure because” the potential profit doesn’t justify the risk of entering a speculative position, Richard Falkenhall, a currency strategist at SEB AB in Stockholm, said in a phone interview on Nov. 21.


Deteriorating Trading

Some nations are taking steps to stem speculation in foreign-exchange markets. Brazil will keep doing whatever is necessary to stop “selfish” monetary policies of some developed nations from hurting its economy by driving up the real, Finance Minister Guido Mantega said at an International Monetary Fund meeting in Tokyo last month.

Selling borrowed dollars to buy Brazil’s currency, where the target interest rate is 7.25 per cent, has lost about 5 per cent this year as the real tumbled, data compiled by Bloomberg show.

Investors betting on an appreciation of Switzerland’s franc against the euro were thwarted when the Swiss National Bank capped the currency at 1.20 per euro in September 2011. That was in response to a surge in the exchange rate as investors sought a shelter from the euro-area’s financial-market turmoil, which broke out in Greece more than three years ago.

Implied one-year Swiss franc volatility versus the euro fell to 5.28 per cent on Nov. 20, the least since April 28, 2010.


ICAP Tumbles

ICAP Plc, the world’s largest broker of transactions between banks, said on Nov. 7 currency-trading volume on its EBS electronic trading platform fell 17 per cent in October from a month earlier. Disruption in New York’s financial district caused by Hurricane Sandy contributed to the decline, it said. The average daily foreign-exchange volume slid 46 per cent compared with a year earlier to $92.6 billion, the least since since at least 2006, the company said on its website. ICAP shares sank 9.2 per cent on Nov. 14 to the lowest close since 2009 after it posted a 26 per cent slump in profit.

“We have been particularly impacted by the rangebound nature of our main currency pairs,” Nichola Hunter, global head of product management at EBS in London, said in a Nov. 21 telephone interview. The SNB’s policy of capping the exchange rate, had particularly reduced EBS’s volumes because the franc had been one of the three most-traded currencies on its platform, Hunter said.


CLS Volumes

Thomson Reuters Corp. said on its website that average daily volumes on its platform fell 23 per cent in October compared with a year earlier to $120 billion. Bloomberg LP competes with Thomson Reuters and ICAP in foreign-exchange trading.

CLS handled an average of $4.66 trillion a day in trades last month, down from $4.90 trillion a year earlier, according to an e-mailed response to questions from the company. It counts both the buyer and the seller in each currency transaction when compiling the data.

While the decline in foreign-exchange price swings is denting bank revenues, corporate investors looking to protect against currency movements can benefit through lower prices to buy options that shelter them from market fluctuations.

“Low volatility is a two-edged sword,” James Bindler, global head of foreign-exchange options at Citigroup Inc. in London, said in a telephone interview on Nov. 21. “As volatility has declined over the year and hedges have become cheaper, there’s been an uptick in corporate hedging activity.”


Barclays, HSBC

Bindler declined to comment on Citigroup’s earnings from currency trading. The bank is second in Euromoney’s ranking.

Barclays’s revenue from bonds, currencies and commodities increased 11 per cent to 5.95 billion pounds ($9.5 billion) in the first nine months of 2012 from the same period a year earlier, “partially offset by lower contributions from foreign exchange,” it said in an Oct. 31 statement.

HSBC, the fifth-largest dealer, said on Nov. 5 that income from currency trading declined 20 per cent to $736 million in the quarter ended Sept. 30 because of a drop in “market volatility compared to the particularly high levels” in the same period the year before. Deutsche Bank said in its earnings report on Oct. 30 that “foreign-exchange revenues were significantly lower than the prior-year quarter, due to compressed margins.”

For Antony Foster, head of Group-of-10 spot currency trading at Nomura Holdings Inc. in London, the outlook for 2013 may be no brighter as the Fed says it will keep borrowing costs “exceptionally low” at least through mid-2015.

“If your view is that there aren’t going to be any changes to monetary policy next year, then G-10 currencies might struggle to break significant ranges again,” he said in a phone interview on Nov. 16.


–Editors: Paul Dobson, Nicholas Reynolds


To contact the reporter on this story: Neal Armstrong in London at [email protected]


To contact the editors responsible for this story: Paul Dobson at [email protected]; Daniel Tilles at [email protected]

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