Currencies Replace Crypto at Forefront of Market Trading Chaos

The atmosphere at a conference of currency market professionals was markedly different from the previous few years: there was a buzz.

Senior executives from banks and brokers were feeling optimistic about the prospects of foreign-exchange trading at the recent gathering in Amsterdam. They’ve spent years eyeing the world of crypto with envy, as digital assets thrived in a highly volatile market, while traditional money remained dull.

Currencies are now at the forefront of the action. Rapidly climbing interest-rate risks around the world and increased geopolitical tensions are fueling a 30% surge in trading and historic moves, reviving an industry that spent the past decade struggling with stagnant volumes.

“FX as an asset class is really back this year,” said Russell LaScala, the global head of FX at Deutsche Bank AG, the world’s largest currency player by market share. “I think last year a lot of macro hedge funds were trading different assets, including crypto.”

The notoriously wild swings in crypto markets have subsided this year, with the Bitcoin Volatility Index shedding more than 50% since a peak in May. By contrast, both Deutsche Bank’s and JPMorgan Chase & Co.’s gauges of currency volatility are at the highest in a decade apart from a spike when the pandemic struck.

And the moves have been shocking: in Japan, authorities sold dollars to prop up the yen for the first time since 1998, while the euro sank below parity with the dollar to a 20-year low. In London, the world’s top currency trading hub, the pound slid to an all-time low.

“Volatility is a bit like a London bus: there are either none to be found for love or money, or three arrive at the same time,” said Kit Juckes, global head of currency strategy at Societe Generale SA.

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The action has drawn in speculative players such as macro hedge funds and grabbed the attention of real-money investors, whose portfolio valuations are now subject to sudden swings. The war in Ukraine and aggressive Fed rate hikes heightened the moves, drawing money to the dollar as a haven and influencing other markets from Bitcoin to stocks.

“FX has become a much bigger focus, even for investors who are not typically focused on FX for two main reasons: the dollar has been the one remaining effective hedge across markets and the dollar’s appreciation has been very tradable for speculative investors,” said Ebrahim Rahbari, the global head of foreign-exchange analysis and content at Citigroup Inc.

At TradeTechFX, the Amsterdam conference, executives packed sessions with titles such as “How can you ready your FX desk for heightened volatility,” before taking to the floor at afterparties fueled by expresso martinis.

Crypto players, following debates on whether progress in building an institutional ecosystem has been “hindered by the ‘winter,’” looked grim, muttering in corners. Bitcoin has been stagnant at around $20,000 for months in a collapse from last year’s peak near $70,000.

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“Crypto seemed to be having all the fun until the central banks started breaking things,” said Tanvir Sandhu, chief global derivatives strategist at Bloomberg Intelligence. “It took inflation to blast the secular decline in currency volatility as central banks unleashed years of suppression. Volatility creates opportunity and it’s a trader’s best friend.”

In fact, cryptocurrencies command only a fraction of volumes of foreign exchange markets, for all the attention they generate. Trades of fiat currencies clock in at around $6.6 trillion each day, according to the Bank for International Settlements. That compares with just under $1 trillion for Bitcoin and other tokens, according to data website CoinMarketcap.

It’s likely that markets are now migrating to a higher range for interest rates and bond yields and that will be accompanied by higher currency volatility on average, Societe Generale’s Juckes said.

This is boon to the firms that dominate the space. Trading activity on major exchanges has soared compared with last year, while profits at the largest currency trading banks stand at multi-year highs.

EBS Market, a platform owned by CME Group Inc., posted a 30% increase in spot trading in September compared with a year ago, with futures trading at a record high. Spot volumes hit $76 billion, the highest since the pandemic struck in March 2020. Other large platforms have also enjoyed a boost, with Euronext FX seeing a 20% increase in August, according to website LiquidityFinder.

Good Business

It’s not all been plain sailing. At times liquidity has still been challenging, said Citigroup’s Rahbari.

“There have been occasions when large asset price movements were in fact observed with relatively little flow, similar to patterns in other markets this year,” he said.

Overall though, the jump in volatility has benefited Deutsche Bank, UBS Group AG and JPMorgan, the top three banks by market share. They control 30% of the market, according to an annual survey of currency trading banks by Euromoney.

JPMorgan clocked up a 15% increase in its fixed-income markets business in the second quarter. UBS highlighted foreign exchange as a driver of revenues that climbed 19% at its global markets division. Meanwhile, fixed income and currencies at Deutsche Bank grew 32%, the best second quarter in a decade.

“I’ve been doing this for a long time and when you get markets that are volatile, but not disorderly, client activity increases and that’s usually good for the business,” LaScala said.