London forex trading turnover surges to record high

LONDON (Reuters) - Britain’s daily foreign exchange turnover rose to a record high in April, the Bank of England said on Tuesday, as investors concerned about central bank policy U-turns sought to protect their portfolios.

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The BoE’s semi-annual survey, which showed daily average FX turnover in Britain jumped 12% to $2.86 trillion in the six months to April, underlined the rude health of London’s foreign exchange industry despite worries about the impact of Britain’s departure from the European Union.

London’s forex market, the world’s biggest, is the crown jewel in Britain’s financial services industry.

On the other hand, currency trading volume in North America fell sharply in April, according to the New York Federal Reserve’s own semi-annual survey.

Average daily volume in North America was $810.9 billion in April, down 18.4% from a year earlier.

The biggest contributors to the record volumes in London were a 23% jump in foreign exchange swaps to $1.46 trillion since October 2018 and an 18% rise in currency forwards.

The surge in turnover came during a volatile period for financial markets as stocks sold off heavily in December, forcing the world’s major central banks, led by the U.S. Fed, to make a U-turn in tightening policy.

However, volatility has been stuck near multi-year lows as central banks appeared to turn dovish in tandem, removing the policy divergences that investors betting on forex markets like to see.

UBS Wealth Management forex strategist Daniel Trum said U.S. interest rates were still among the highest in the developed world even as markets price in Fed interest rate cuts.

The jump in turnover was “very likely due to hedging activity given the high interest rate differential with the U.S.,” he said, pointing to U.S. investors in the UK and British investors in the United States as likely the most active.

Uncertainty surrounding Britain’s departure from the European Union had also supported volumes, Trum added.

Volumes in spot and non-deliverable forwards were broadly stagnant over the six months, according to the BoE survey.

Turnover in euro/dollar and sterling/dollar currency pairs rose by 18% and 16% respectively, posting a record average daily high.

Dollar/Chinese yuan turnover increased by 6%, and trading in the currency pair again represented a larger market share than that of euro/sterling.

The growth of offshore yuan trading, albeit from a low base, above euro/sterling volumes comes despite many participants using the single currency and pound to express their view on the Brexit negotiations.

Reporting by Olga Cotaga; Additional report by Richard Leong in NEW YORK; Editing by Tommy Wilkes, Jan Harvey and Paul Simao