Currency-Trading Volumes Jump
Global Monetary-Policy Shifts Seen Creating Opportunities for Traders
By James Ramage and Chiara Albanese
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The Bank of Japan’s headquarters in Tokyo. Many investors bet the yen would weaken ahead of the central bank’s Oct. 31 policy meeting. Photo: Associated Press Currency-trading volumes soared to records late last year, according to new data released by six central banks, underscoring the profit opportunities created by a series of monetary-policy shifts around the world.
The average amount of money changing hands daily in foreign-exchange markets around the globe jumped 21% in October from a year earlier, to $4.8 trillion. The data came from surveys conducted twice a year by central banks in the U.K., U.S., Canada, Singapore, Australia and Japan and is thought to cover a majority of currency trading.
Much of the increase stemmed from a surge of interest in a single trade: the direction of the dollar-yen exchange rate. Many investors bet the yen would weaken ahead of the Bank of Japan ’s Oct. 31 policy meeting. That day, the central bank announced a surprise expansion to its asset-purchase program that triggered the yen’s worst one-day loss in more than a year.
Wagers on the euro-dollar currency pair also were up sharply in October, the central banks said.
Investors say central-bank moves such as the Bank of Japan’s have presented more chances to wager on currencies than at any time since the financial crisis. Central banks in Europe and Asia are introducing new stimulus programs to fight flagging growth, competing to nudge their home currencies lower to help exporters.
Money managers also are wagering that the dollar will rise against most currencies as the Federal Reserve gets closer to raising interest rates.
Already this year, the euro plunged to an 11-year low against the dollar after the European Central Bank introduced a bigger-than-expected bond-purchase plan. The Swiss franc shot higher after the Swiss National Bank removed its cap on the currency’s value against the euro.
These policies and others are likely to set off long-term moves in heavily traded currencies, an environment where investors can thrive, said Scott Minerd, global chief investment officer at Guggenheim Partners LLC.
Hedge Fund Research Inc.’s currency index, which aims to reflect the performance of foreign-exchange hedge funds, rose 4% in 2014, after falling in the previous three years.
“There certainly is more focus on currency trading as a way to profit from all these central-bank policy moves,” Mr. Minerd said. “And that is increasing activity in the currency market.”
Some investors say they are making bets that will profit from the widening gap between the Fed’s policies and those of central banks in other major economies. The Fed ended its asset-purchase program in October and is considering an interest-rate increase later this year. That increases the appeal of some dollar-denominated assets and has fueled a monthslong rally in the U.S. currency.
These trend-chasing investors have made especially big bets on the dollar to rise against the euro and yen, as central banks in Europe and Japan have taken the most aggressive steps to stimulate growth and raise inflation.
“These things go in trends,” said Eric Stein, co-director of global income at Eaton Vance Management, which oversees $296 billion. “It used to be the weak-dollar trend. Now it’s a strong-dollar trend. For many trend followers, looking for general dollar direction, this strong-dollar trend generally helps encourage trading.”
The upswing in currency trading volumes reverses a trend in the years after the financial crisis, when activity was declining. The developed world’s central banks had set interest rates closer to zero, reducing the incentive to switch between currencies to chase higher returns. Trading volumes declined almost 4.5% between April 2011 and October 2012, after rising 42% in the previous four years.
Volumes have recovered since then, topping $4 trillion a day in the central-bank surveys for the first time in April 2013. The Bank for International Settlements estimated total global trading volumes of $5.3 trillion a day in a global survey last conducted in April 2013.
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