The interest of traders and the trading volume on forex has increased in the recent years, which is not surprising. But there are few currencies that can boast with rapid growth. So what tools have made a significant breakthrough in liquidity and which ones look poor?
In the immense chaotic space of the foreign exchange market you can notice seven currencies that are the most popular and confidently occupy the leading positions in trade. And even if sometimes there are some storms that come very close to the leading currencies, these are some calm winds in comparison with the hurricane that is looming in the forex market. In recent years, several second-tier currencies have significantly increased their importance in the global market, and that is a threat to the present hierarchy. While some of the seven second-tier currencies are obvious, the others are less visible, and at first sight, it is a little bit difficult to determine these. But before clarifying the situation, let’s go over the entire forex market and see the currencies that dominate at the present time.
The turnover in forex is growing by leaps and bounds
According to the Bank for International Settlements, the daily turnover of currency market over the past three years has increased by more than 30%. The Bank for International Settlements is one of the most reliable and authoritative sources of information about the global forex market. As a result of studies carried out in April 2013, the turnover of the forex market throughout the world is about 5.3 trillion dollars a day, and in 2010, the daily turnover was $ 4 trillion. If we look at the statistics in the earlier periods, then the present rates are even more impressive. For comparison, you should know that the turnover is 4 times higher than in 2001. Then, the trading volumes were at the level of $ 1.2 trillion per day.
Who are the favorites today?
Investigations of the Bank for International Settlements showed that the US dollar continues to be number one, and significantly ahead of its nearest competitors, despite the assumption of a possible weakening from its side. The operations and deals that involved dollars constituted over 87 % of the average daily turnover of the forex market in April 2013 (You should note that there are two currencies involved in transactions, so we speak about 200% and not 100%). In the next three positions in the top list are euro (33.4), Japanese yen (23.0), and pound sterling (11.8). From all these three, the Yen shows the highest growth. All these four top currencies boast high demand, as before. The next on this list are the Australian dollar, Swiss franc and Canadian dollar. These currencies changed positions between them from 2001.
What are the currencies that challenge the top ones?
Three of the seven leading second-tier currencies are easy to identify, they belong to some of the fastest growing economies and participating countries in BRIC: Brazilian real, Indian rupee and Chinese yuan. This list should also include the Russian ruble, which is also a fast growing economy, and a BRIC participant, but we all know the political and economical challenges of today’s Russia, and this has a direct influence on the rubles. The other three currencies are less visible: the Mexican peso, Turkish lira and South African rand. The total share of average daily turnover in the Forex market of these seven currencies has increased from 6.2% in 2010, to 10.8% in 2013. It is worth to mention here that all seven currencies belong to developing markets economies. Some currencies from this list recognized incredible progresses in terms of daily turnover. This refers in particular to Mexican peso, and Chinese yuan. For example, the Mexican peso trading volume increased by 171% since 2010 to 2013, rising to the 8th place among the most traded currencies at that time. However, this is not a limit. The Chinese yuan increased with 250% to 2013, which made possible to rise on the 9th place.
The increase of these “new” currencies was due to weakening of euro, Swiss franc and Canadian dollar. The role of the euro has decreased because of the debt crisis that hit Europe in 2010. Even so, euro is still the second most traded currency in the world.
“The fragile five”
The ability to use leverage can be an explanation to the exponential increase of the trading volume of developing countries, but this is not the only reason. Most of the seven less important currencies are offering highest rates, making them attractive for traders. For example, on May 2014, the yield on 10 year government bonds in such countries like Brazil, India and South Africa was 11.18%, 8.71% and respectively 8.04%. And if you compare this indicator with USA – 2.55%, it becomes clear why the rates are attractive.
But the high interest rates in these countries are due to high inflation. Some of these developing countries with promising economies also suffer from structural problems such as a growing budget deficit. That is why Morgan Stanley Bank made reference to these economies (Brazil, Indonesia, India, South Africa, and Turkey) as the “fragile Five”. Fears of tighter monetary policy of the USA have created problems for the countries in terms of attracting foreign capital to finance its deficits, which led to a sharp decline in quotations of currencies in the period from the summer of 2013 - 2014.
According to the analysis of the Bank for International Settlements, forex strategies based on quantitative easing, have not been the main driver of growth of turnover from 2010 to 2013. During this period, the interest rate differential was reduced because of the loose monetary policy of many central banks. Most currencies were in fairly narrow ranges, and sudden, unexpected actions, such as those made by the European Central Bank during the debt crisis, have become a real challenge for strategies based on quantitative easing. As a result, the hedge funds practicing such transactions and strategies faced with a significant outflow of assets, and the funds granted under the trust, eventually declined.
#ironbr300x250#Who runs the show?
Based on data provided by the Bank for International Settlements, there are 3 main reasons that explain the soaring sales of the forex:
- Exceptional demand for OTC forex derivates (such as currency forwards, swaps and options).
- The “internationalization” of the currencies from developing countries - the offshore trading or currency trading outside the established jurisdiction is a kind of “internationalization” of the currency, and this figure had shown rapid growth (especially in Asia).
- The “financialisation” of the currencies in developing countries (the process in which the financial institutions and markets increase their size and influence)
What we have in the end? Currencies of developing countries has a good future, they will continue to grow, thanks to demand from hedge funds and speculators, as well as the process of internationalization and “financialisation” that will enable them to gain momentum, from year to year to increase its area of influence.