A major decline in foreign exchange in 2015

According to a major survey that was carried out in 2015, turnover in EUR/USD fell by 17% in October 2015, which translates to $640 billion per day. On the contrary, the turnover in AUD/USD rose by 8%.

A survey carried out in the key financial institutions that deal with the foreign exchange by the Bank of England has revealed that a 14% drop in trading volumes has been experienced since April 2015 and a 21% drop since a year ago. The Bank of England measures the vast volumes traded in the markets of global currency.

The survey further revealed that the average daily volume of FX that was traded in the UK in October 2015 was very huge, about 2148 billion or approximately 2.15 trillion dollars. This translates to two-thirds of the yearly GDP in the UK during an average day. This data revealed a noticeable drop in flows as compared to six months ago. However, this drop was still higher at 2481 billion.

Many of the transactions were from Foreign Exchange Swaps that are utilised by the company to circumvent against foreign currency threat in the future, which accounted for 1019 billion in total. According to the report, the huge fall between April and October was in the Spot FX market. It stated that “The turnover in all products dropped over the six months to October 2015. The FX spot turnover dropped by 24% that is $737 billion per day down to 34% during the previous year.”

Regarding the actual currency pairs, the report showed that the currency pair that dropped the most is the EUR/USD. Turnover in many currency pairs dropped. Ideally, the turnover in EUR/USD dropped by 17% in October 2015 to $640 billion every day. On the contrary, the turnover in AUD/USD rose by 8% while that in USD/CNY progressed higher, up by 3%. The largest currency pair currently is the USD/CNY.

There was no informative explanation from the report as to why trading volumes had dropped by a fifth over the last year. However, Jeremy Stretch of CIBC Capital Markets was pointed out by Yahoo Finance as using increased regulation as a factor.

Certainly, the regulation was promoted in many jurisdictions after the Swiss Franc debacle last January, after the SNB eliminated the cap on their currency leading to high losses for several brokers and their clients. This move by SNB led to regulators in the US to increase the minimum margin conditions on several institutional FX transactions, which would have resulted in an immediate drop in volumes as clients would have needed to set aside extra capital so as to receive the same leveraged volumes as compared to last year.

The elimination of the Franc’s cap resulted in several brokers being bankrupt as many traders lost their trading capital as well. This too might have had a small impact on trading volumes. Another reason that led to the drop in FX trading volumes is the dollar’s appreciation. This is because trading volumes are reported in dollars and the stronger currency translates into a reduction in overall volume as compared to using a different weaker currency to report the turnover. However, while this explains the drop in volumes during the year, an increase in the value of the reporting currency cannot elaborate the 14% drop in volumes from April 2015 as the dollar index merely changed in value from April to October 2015.

According to the BOE’s report, many of the marked drops were in Options Trading and Spot, which dropped from 973 billion to 737 billion between April and October. Spot Forwards and Options are the most preferred tools of speculators that explain why the trading volumes dropped extremely during that period.

The UK remains the key leader in the world of foreign exchange in line with trading volumes with a total turnover of 2148 billion in October.