Emerging market ripples still driving currency trading volumes

LONDON Fri Feb 21, 2014 7:16am EST

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LONDON Feb 21 (Reuters) - January's spiking volumes in the foreign exchange are holding up in February because the selloff in emerging market currencies is still boosting demand for more liquid, major currencies, traders and officials said.

Average daily volumes rose more than 20 percent in January, from December, topping $5.3 trillion, according to settlement bank CLS, driven by emerging market outflows into more liquid currencies such as the dollar, the euro and the yen .

This rise in volumes mirrored a similar surge in daily forex trading on ICAP-owned EBS and that of its main competitor, Thomson Reuters. Spot foreign exchange trading volumes on both dealing platforms rose more than 20 percent in January.

The trend so far this month indicate that these levels are likely to hold.

A senior official at EBS told Reuters that volumes in February were showing little signs of flagging. That is despite signs that the pace of the selloff in emerging market currencies has slowed somewhat compared with late January.

"February volumes are holding up well for us even though there is low volatility in the market, and we have even experienced record volumes in our emerging markets products as well as non-deliverable forward pairs," said Darryl Hooker, head of strategic currency initiatives at EBS.

Many leveraged and long term investors like sovereign wealth funds use non-deliverable forwards - essentially expectations of future moves - to hedge exposure to less-liquid emerging market currencies and assets.

"We're not seeing traders leaving the market, but rather have seen new groups come online. The volumes on our Russian rouble product are steady and near record levels and holding. The dollar/Chinese yuan is also holding up well," Hooker added.

The Russian rouble has fallen to record lows against the euro while the Chinese yuan hit its lowest in nearly three months against the dollar in the onshore market this week. The offshore spot Chinese yuan fell to its lowest against the dollar since early October.

Emerging market assets have slumped since last May on expectations that less monetary stimulus from the Federal Reserve will drive up U.S. yields and make them more attractive.

That is driving yield-seeking investors to pull back a tide of investment that flooded into these markets in recent years and causing their currencies to drop sharply.

Many emerging market currencies like the Russian rouble, the Turkish lira, the Ukrainian hryvnia and the South African rand have been hit further by problems of their own ranging from political to economic woes. That has unnerved investors.

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The selloff in emerging markets is underpinning demand for assets in developed markets, traders and analysts said.

A London-based trader at a European bank said that renewed demand for European assets, both bonds and stocks, was driving volumes in the euro. Besides, European banks are steadily cutting exposure to emerging markets, burnishing the euro.

"The divestment that is taking place in emerging markets is going into developed markets," said Peter Kinsella, currency strategist at Commerzbank, who added that the currency market was still seeing some good liquidity unlike towards the end of last year when volumes had slumped.

"What we are seeing within the G10 currency space is a very one-directional trade. There is demand for currencies where there is growth, like sterling, to some extent the euro and the dollar."

G10 currencies include major currencies such as the euro, the dollar, the yen and the Swiss franc all of which enjoy huge liquidity. Of these, the yen and the Swiss franc are traditionally currencies of choice when there is a financial market turmoil or doubts about global economic growth.

EBS's Hooker confirmed that any sell off in emerging market currencies would shore up volumes in more liquid currencies on his platform.

"The Chinese yuan/yen has seen substantial retail interest from Japan and has been traded well through the legs on EBS. More and more customers are also enquiring about euro/yuan. We are well-positioned for any changes in the market dynamic with regard to trading these crosses," he added.

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