Trends in Foreign Exchange Trading. (Articles)
Rosborough, Lauren, The Reserve Bank of New Zealand Bulletin
Financial Markets Department (1)
In this article, Lauren Rosborough discusses how global and domestic foreign exchange markets have changed in recent years. These trends are illustrated using the latest Bank for International Settlements triennial foreign exchange and derivatives market survey and other indicators of foreign exchange market liquidity. The size and structure of the New Zealand foreign exchange market has altered in recent years. Trading in the New Zealand dollar now occurs predominately in Australia. There is some evidence to suggest that New Zealand dollar spot market liquidity has fallen but the New Zealand dollar remains quite liquid considering the small size of the New Zealand economy.
Over recent years the structure of the global foreign exchange market has altered significantly, reflecting a number of events such as the introduction of the common currency in Europe and changes in the way that market participants have chosen to manage their foreign exchange exposures. Significant changes have also occurred in the New Zealand dollar and the way that it is traded. A particularly important development has been the tendency of banks to shift their wholesale trading operations to Australia. Market participants and commentators have also noted that the New Zealand dollar seems less active and liquid than it has been in the past. An often-cited factor for the decline in activity has been a generally reduced presence of offshore investors in New Zealand's most actively traded asset markets and hence in the New Zealand dollar. The recent release of the latest BIS global survey of global foreign exchange market turnover provides a good opportunity to explore some of these issues.
The article proceeds as follows. Section two describes and explains recent changes in the structure of the global foreign exchange market and shows how trends in the structure of the New Zealand market fit into that context. Section three looks into trends in the domestic market more closely. Section four introduces the concept of foreign exchange market liquidity and examines the evidence there is to hand on the liquidity of the New Zealand dollar. Section five concludes the article and summarises the main findings.
2 Global trends in foreign exchange markets
During April 2001, 48 countries participated in the Bank for International Settlements' (BIS) triennial central bank survey of foreign exchange and derivatives market activity. (2) Each central bank reports to the BIS on a number of aspects of the trading activities occurring in their own countries. The BIS then aggregates the results. Many central banks also release their national results.
The size of foreign exchange markets
Total global foreign exchange activity was USD 1,210 billion on average per day in April 2001 -- a fall of 19 per cent between 1998 and 2001. (3) While the decline in traded volumes is large, it comes after a decade of significant growth (see chart above). Over half (56 per cent) of global foreign exchange turnover occurred in the United Kingdom, the United States and Japan (with London the pre-eminent global centre for foreign exchange trading) -- see table 1. Since the first BIS survey in 1989, these three countries have usually been the three largest trading centres, traditionally capturing around 55 per cent of global turnover. While the proportion of total turnover that occurred in these main markets held steady during 2001 relative to 1998, there have been some interesting changes in the shares of the individual markets and in the shares of many other smaller markets. Box 1 (at the end of section 2) discusses this issue and shows that there has been a tendency for trading to gravitate towards regional h ubs, which has resulted in some trading centres gaining significant market share at the expense of others.
Perhaps more interesting is which currencies are traded. …