What Happened to the Forex Market?

A headline in Bloomberg Business reads, “World’s Biggest Market Shrinks at Least 20% as Profits Slide”. It turns out that in October North American trading volume shrank by 26% compared to 2014.

North America’s average daily volume fell 26 percent from the previous October to $809 billion, the Federal Reserve-sponsored Foreign Exchange Committee said in a statement on its website Monday. Turnover in the U.K., the biggest center for foreign-exchange dealing, dropped to an average $2.15 trillion, 13 percent lower than in April and down 21 percent from a year earlier, the Bank of England said. That was its lowest daily level since 2012.

The declines coincide with currency managers losing money last year, according to a Parker Global Strategies LLC index tracking top funds in the industry. A measure of currency volatility fell below its five-year average in October, diminishing the price swings that traders exploit for profit, while investors were still struggling to come to terms with China’s surprise devaluation of the yuan in August.

While North American and European trading volumes fell trading volumes rose during the year in Japan, Singapore and Australia. Part of this is due to the volatility of the Yuan and how it affects China’s Asian trading partners. What happened to the Forex market? Is this the start of a long term trend or was it just an unusual month?

Forex Trading Heading Back Up

According to Reuters FX volumes are coming back up after their 3 year low.

Jan 11 Daily spot trading volumes on currency trading platforms run by Thomson Reuters inched up to $91 billion from a three-year low in December, according to figures published by the company late on Friday.

Thomson Reuters said on Monday that its FX dealer-to-client venue saw a 166 percent surge in options trading volumes in 2015 compared with the previous year, with record-high monthly, weekly and daily volumes in the fourth quarter.

It would appear that many Forex traders opted for options instead of other trading strategies. Nevertheless the slight increase in December perhaps indicates that what happened to the Forex market in October was not the start of a trend.

Currency Speculation versus International Business

The Forex markets exist to allow for international trade. When the global economy shrinks it is natural to see a slight decrease in Forex trading. However, currency speculation is another issue. Forex speculators trade currencies in order to make money. When volatility falls off so do profits. This is the best explanation for what happened to the Forex market in October. If volatility is the key to profits and higher Forex volume we may want to look towards the Yuan as China deals with it economy and currency outflow issues.

China’s yuan fell the most since August, hastening its decline in extended trading hours on speculation the authorities stopped supporting the currency late in the day. The challenges for China are to control the currency as Yuan losses accelerate but to gradually move to a market driven currency and at the same time maintain control of a slowing economy.

Of course Forex traders are not so much concern with which way a currency is headed as making the right assumptions that lead to profits.