A slump in market volatility has hit currency trading desks, squeezing banks’ margins, denting revenue and undermining the recovery from a plunge during the Covid-19 pandemic.
(Bloomberg) — A slump in market volatility has hit currency trading desks, squeezing banks’ margins, denting revenue and undermining the recovery from a plunge during the Covid-19 pandemic.
Foreign-exchange trading revenue fell 15% in the first half compared with a year earlier, according to figures from the top 100 banks collated by London-based BCG Expand Research. Without a second-half pickup, revenue could be heading for its second full-year decline in three years, after a drop in 2021.
Weakness in trading was a theme in recent earnings from banks, with institutions including Goldman Sachs Group Inc. and BNP Paribas SA reporting lower activity in fixed income, currency and commodities.
Part of that reflects tough year-earlier comparisons. Currency volatility has been on a downward trend since late 2022, after Russia’s invasion of Ukraine combined with the most aggressive central bank tightening cycle since the 1980s ripped through currency markets last year.
Now, central banks have shifted into data-watching mode and economic data is mixed, leaving traders muddled as to which bets to play. This has dampened swings between currency pairs, and the tighter trading ranges are reducing the margins banks are able to charge.
The macro-uncertainty has also seen some clients retreat from the market, and spot FX volumes fell 7% in the first half of 2023, according to Expand. In terms of clients, hedge fund activity dropped 3%, real money activity was flat and corporate client volumes rose 6%.
“Margins on FX spot and outright transactions were compressed due to lower volatility,” said Rishi Baveja, principal at Expand. He also cited the impact on the market of rising electronic trading and participants.
Latin American currencies stood out for the strong growth in traded volumes, fueled by demand for carry trades. Banks saw volumes in the Brazilian real, Chilean peso and Columbian peso grow 10-20% in the first half of the year, according to Expand.
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