The Bank for International Settlements (BIS) undertakes a triennial survey of the size and structure of the global foreign exchange market. This survey has been conducted since 1989, and is probably the world’s most comprehensive assessment of the global foreign exchange market. The latest survey of turnover took place in April 2013, and is based on data obtained from 53 central banks, and about 1 300 banks and other foreign exchange dealers.
The global foreign exchange market achieved an average daily turnover of $5.3 trillion in April 2013. This is up from $4.0 trillion in April 2010 and $3.3 trillion in April 2007. Amazingly, foreign exchange trading with non-financial customers, mainly corporations, actually contracted between the 2010 and 2013 surveys, reducing their share of global turnover to only 9%. Stated differently, the vast majority of the daily trade in the world’s foreign exchange is related to financial market activity that is undertaken by the large financial institutions.
Foreign exchange trading is increasingly concentrated in the large financial centres. In April 2013, sales desks in the United Kingdom, the United States, Singapore and Japan represented 71% of world’s foreign exchange trading, with the turnover in the UK (London) market more than twice the size of the entire United States. London is still the centre of the world’s financial markets. In fact, foreign currency trading in the UK is larger than the currency markets in the United States, Singapore, Japan, Hong Kong, Switzerland and France, combined.
The currency composition of global foreign exchange trading shifted notably between 2010 and 2013, not only among the world’s most actively traded currencies, but also among important emerging market currencies. The growth in the role of emerging market currencies reflects their growing importance in the world economy, which was accentuated during the global financial market crisis.
The US Dollar remains, by-far, the dominant globally traded currency, represented in 87% of all foreign exchange trades in April 2013, up a substantial 2.1 percentage points from 2010. The Euro is the second most traded currency, but its share fell sharply to 33% in April 2013 from 39% in April 2010. The international role of the euro has shrunk significantly since the beginning of the Euro-area sovereign debt crisis in 2010. In April 2013, the Euro’s share of the foreign exchange market reached its lowest value since the introduction of the common currency, and is clearly not a viable candidate to take-over the Dollar’s role as the Reserve Currency of the world. In contrast, the turnover of the Japanese Yen increased significantly between the 2010 and 2013 surveys, from 19% to 23%. Most of the rise in Yen trading occurred between October 2012 and April 2013, a period characterised by expectations of a fundamental change in Japanese monetary policy; which took place in April 2013.
Growth in the role of emerging market currencies has been impressive. In particular, the Mexican Peso is now the 8th most traded currency in the world (2.5% of world trade, or $135 billion a day) up from 14th in 2010, while the Chinese Renminbi entered the list of the top 10 most traded currencies for the first time, with 2.2% of world trade (currently ranked 9th), mostly driven by a significant expansion of offshore Renminbi trading.
As recently as 2004 the Renminbi was only 29th most traded currency in the world. It improved to 20th position in 2007, 17th in 2010 and now 9th in 2013. Clearly, the Chinese currency has got a long way to go before it can be considered a major currency by global standards, but it has gained significant traction in the past 3 years, with the value of global trade in the Renminbi jumping by a staggering 249% from $34 billion a day to $120 billion. This compares with a gain of 38% in Dollar trade.
The South African Rand is ranked at the 18th most traded currency, with 1.1% of world trade, up from 20th in 2010. However, back in 1998 the Rand was ranked 10th in the world. It then dropped to 13th in 2001, 16th in 2004, 15th in 2007, 20th in 2010 and now 18th. This does not mean that the trade in the Rand has dwindled, in fact the growth in the value of Rand traded globally has been very impressive, rising a massive 108% in the past three years. However, the trade in a number of other emerging market currencies have simply grown at a faster pace; especially the large emerging markets such as China, Russia, Mexico, and Turkey. The Brazilian Real is the 19th most actively traded currency, while the Indian Rupee is in 20th position
Interestingly, South Africa (represented mostly by foreign exchange trading in Johannesburg) accounts for only 0.3% ($27 billion) of the world’s daily foreign exchange market turnover, yet the Rand accounts for 1.1% ($60 billion) of world’s daily currency trading. This difference in percentage is because approximately 55% of all the daily trade in the Rand takes place outside of South Africa – mostly in the UK – between non-residents of the country. This is partly because there are almost no foreign exchange control restrictions applied to foreigners when dealing in the Rand, yet numerous foreign exchange controls remain effective for South African residents. It also highlights the difficulties the South African Reserve Bank faces in trying to significantly and consistently influence the value of the Rand.
Lastly the BIS report highlighted that the most traded currency pair in the world is the USD/EUR which accounted for 24.1% of all transactions in April 2013; down from 27.7% in 2007. This was followed by USD/JPY (18.3%) and USD/GBP (8.8%). Trade in the Australian Dollar is surprisingly high with the USD/AUD accounting for 6.8% of the world market. (The Australian Dollar is the 5th most traded currency in the world).
Unsurprisingly, the USD/ZAR accounts for only 1% of world currency trade, but is the most dominant traded currency pair involving the Rand. The BIS report identifies that the USD/ZAR pair accounts for a massive 85% of the entire Rand market. However, in calculating South Africa’s real effective exchange rate the Reserve Bank uses a much broader range of currencies, including a significantly higher weight for the Euro. This is because the Reserve Bank is trying to reflect South Africa’s value of foreign trade in goods and services and not the value of the Rand traded on the financial markets.
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