FX volatility fuels earnings hope

After a lacklustre first quarter, forex dealers are now hoping to see increased earnings from trading opportunities sparked by the reversing of the dollar appreciation against other major currencies and ongoing intervention in the dollar/yen market.

"FX is back in vogue," said one global FX head at a Canadian bank in Toronto. "This is partly due to the slump in investment banking activity. We’re hoping the early part of this year was the low ebb," he said.

"All things being equal," said another global head of FX at a major US bank, "higher volatility is generally good for market-making dealers of FX."

One global foreign exchange chief in Chicago said the pick-up had set in at the beginning of April. "Prior to that it was very difficult to spur client demand for FX with the lack of movement."

Much of the forex market’s expectations of boosted revenues has come from new evidence that the dollar’s recent fall is a long-term trend.

"We have seen real money behind the dollar selling and that suggests the trend is now in place," said one senior foreign exchange dealer at a US bank in London. The overriding trend in recent years of foreign direct investment flowing from Europe and Japan into the US has also encountered a sea change, and capital is now finding its way into different nations.

Japan has started to emerge as the surprise beneficiary: "We are seeing a 10% improvement in the yen when Japan’s economy is wracked by woes," said one senior dealer. And currencies such as the Australian dollar and Norwegian krone have also been garnering strength.

These trending markets will provide additional sources of income for foreign exchange dealing desks, officials claimed.

"A lasting trend could well be a good money-maker for banks, and it is a good thing for the FX markets," said the senior dealer in London.

Added the Canadian FX head: "Any time that markets are trending, people are more confident in increasing risk. I think now we have a two-way bet on the dollar, asset managers and currency overlay managers are also increasing trading."

Market developments since the September 11 terrorist attacks in the US have also played their part in the increased activity. "There was a lot of uncertainty post 9/11 and there was a lot of demand for the US dollar as a safe haven," said one global head of FX. "But now people are asking where the next trading opportunity will be."

Although volatility is back in the markets, banks are unlikely to go on hiring sprees to meet the demand just yet. "The market being the way it is at the moment, we are waiting to expand," said one FX sales head at a European bank in London. "We are seeing a lot of evidence of pick-up, but we need to see it sustained. We don’t want to be hiring people only to have to let them go again if this trend doesn’t hold."

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Smarter trading in a fragmented world

FX Week recently hosted a webinar in partnership with Refinitiv to ask foreign exchange industry leaders to discuss geopolitical challenges, market changes and developments, and evolving technologies, and how they have shaped forex markets in Asia

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