I’m sure you’re well aware of how the forex OTC market is the largest one in the world and how the U.S. dollar is the one currency to rule ’em all, but have things changed recently?
In our School of Pipsology, we’ve explained how the forex market encompasses transactions of financial institutions, corporations, banks (except maybe Gringotts), investment funds, and individuals all around the globe. And that’s why it dwarfs other markets like stocks, commodities, derivatives, or even cryptocurrencies!
The latest update from the Bank of International Settlements or BIS, which is an international financial organization owned by 60 member central banks and represents countries that together make up for 95% of the world’s GDP, confirms that the forex market transactions averaged $5.1 TRILLION per day as of April 2016 versus $30 billion in the futures market.
If you’ve been keeping up with these metrics rather than the Kardashians, you might have noticed that forex volumes are down from the $5.4 trillion per day level as of April 2013. Also, the latest triennial BIS report revealed that spot forex turnover declined for the first time since 2001 from $2 trillion per day in April 2013 to $1.7 trillion per day in 2016.
The currency breakdown is roughly the same, with the scrilla still the “King in the North” at 88% of all trades. What’s interesting to note is that the euro, Japanese yen, and Australian dollar gave up some market share while several emerging market currencies like the renminbi took a larger slice of the pie.
Of course it’s also worth noting that the renminbi was added by the IMF to its basket of reserve currencies around that time, allowing its average daily turnover to nearly double from $120 billion to $202 billion in a span of three years.
Taking a look at the geographical distribution of these forex transactions indicates that the trading kingdoms in Dorne, King’s Landing, The Vale, The Iron Islands – Oh sorry, I meant the United Kingdom, United States, Singapore, and Japan – still dominated with 77% of global market activity.
The share of Uncle Sam was virtually unchanged at 19% but that of London fell from 41% in April 2013 to 37% in 2016 due to Brexit concerns. Then again, the entire euro area also reported declines in market share while Asian financial centers like Tokyo and Hong Kong enjoyed gains.
Now the next BIS triennial report (or the next season of Game of Thrones?) won’t be out until April 2019, but the quarterly review released earlier this month contains some noteworthy insights. In particular, it noted an increase in risk-taking and carry trade activity, as well as the impact of the pace of monetary policy tightening.
To wrap it all up, the forex market still holds a pretty large lead against other asset classes, despite changes in financial regulation, monetary policy, or the relationship status between the EU and the U.K. (currently “It’s complicated”) so liquidity could remain well-supported for the foreseeable future. That means instantaneously quick trade execution for you and me!