FX markets turn up the volume

Deutsche Bank's Clifford Cheah explains why Asia's currency markets are just starting to take off.
Clifford Cheah
Clifford Cheah

The Bank for International Settlements (BIS) recently released preliminary data from its triennial survey on global currency markets. Clifford Cheah, Deutsche Bank’s head of global finance and foreign exchange in Asia, helps us break down what’s behind the numbers, and tells us why he thinks growth in FX markets is only just getting started, especially in Asia.

The BIS data show that trading volume in global FX markets grew by 20% during the past three years. What do you think is driving this?
I think it’s quite interesting to take a look at some of the geographic drivers behind the turnover growth, recognising that there has been a consistent rise in trading volumes in Asian markets during the past few periods of the survey. In line with this, during the past three years there was volume growth in every Asian market, with significant jumps in activity in China, Hong Kong, Japan and Malaysia. In addition, there has been growth in turnover for new currencies and new currency pairs.

FX is a real world market, closely linked to macroeconomic trends and the global economy. As such, the growth in new currencies, higher percentage of trading in emerging market currencies, and increased trading in Asian financial hubs reflect the current global reality, with economic growth in emerging markets remaining stronger than in the developed world.

This is certainly true in Asia, where we manage about a quarter of all FX flows. The upward shift in trading volume has been a structural one as Asian economies continue to grow and the capital markets grow with them. Increased trade in the region naturally spurs increased currency trading, and we are seeing that first hand. As Asian currency markets continue to progressively open up, that FX turnover will only grow further.

The survey also reveals that for the first time, turnover by hedge funds and other financial institutions has surpassed inter-dealer transactions. Is the inter-dealer market on the decline? What implications does this have for the development of the market? 
I don’t think that this reflects any decreasing importance in the inter-dealer market. Rather, it demonstrates the way in which banks are constantly improving the way they facilitate flows between clients, with investment in technology and services. This is leading to increased market stability and allows market-making to continue, even in times of stress. At Deutsche Bank, we have invested heavily in technology and risk management processes that are increasing liquidity for our clients.

It looks like corporate volumes are down in comparison to fund volumes. Why is that?
There are a number of factors at play here. Obviously the cost of credit has increased, which may have contributed to corporates doing less in the FX market. Also, the escalation of electronic and high-frequency trading has pushed overall financial institution volumes higher.

But I think the more meaningful trend that we’re seeing is really the continued growth of FX as an asset class. This has attracted increased asset allocation to FX from financial institutions, and increased use of FX by funds traditionally investing in other asset classes. Liquidity in FX is high and growing, and as a result I think we can expect the volumes in FX trading to continue to increase as investors progressively recognise the vast potential and flexibility of these markets. For example, we are seeing some funds starting to use FX as a proxy hedge, or focusing increasingly on FX hedging in the absence of other options. 

It sounds like the theme has been a sustained rise in turnover for this market, and you see plenty of momentum to keep it going. How will your business strategy change as the volume of trading in FX continues to dramatically increase and the market continues to develop?
Our focus continues to be to deliver the best liquidity and pricing for our clients. We are achieving that through extensive investment in highly sophisticated technology. E-commerce now accounts for more than 70% of our FX volumes and allows us to offer tighter spreads and greater liquidity for our clients. 

We view the driving of technological advancement as a critical trigger for a virtuous cycle of development. As technology improvements facilitate the tightening of spreads, prices become more attractive, leading ultimately to an increase in trading volume. Increased volumes together with enhanced technology also lead to greater transparency and functionality, and the cycle continues. 

What do you see as the prevailing trend in the Asian FX markets this year?
I think it’s clear that for Asia, the theme of the year has been the continued opening up of the FX markets. There have been a lot of groundbreaking developments around the region pointing to exciting times ahead, including an offshore deliverable renminbi forward market in Hong Kong, Asia’s first synthetic local currency global bond out of the Philippines, and moves towards the liberalisation of the Malaysian ringgit, among others. The growth in liquidity, flexibility and sophistication of FX instruments in Asia is charging ahead at a rapid pace, and will undoubtedly push up trading volumes further -- all of which is good news for the ongoing development of healthy FX markets in the region.

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