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Sterling Performance: London is the cash capital

05 November 2010 Written by 

What does Britain do better than the US, that's worth - in one day - what Germany produces in an entire year, and has gained 20% in transactional volume since it was last measured? It's the City of London's share of the global forex market, and it's never been bigger...

Last month, London expanded its role as the world's largest centre for currency trading, with its share of the pot rising over two percentage points to handle 37% of all forex trading conducted globally.

Second came the US with 18%, followed by Japan with six per cent, nudging out Singapore and Switzerland to take the No.3 spot.

The latest triennial survey of turnover in the forex markets by the Bank for International Settlements (BIS) revealed that between April 2007 and April 2010, the UK not only continued to be the single largest centre of foreign exchange activity, it also increased its average daily turnover in the UK forex market by 25 per cent in the period to $1,854bn.

At the same time, the BIS estimated that the US$4 trillion worth of currencies traded a day works out to be some 70 times the value of goods and services that actually change hands. But what's more attention-grabbing is the 48 per cent jump in 'spot forex trades' to US$1.5 trillion a day over the past three years.

The ceaseless march of popularity in the forex market is being spurred by an increase in global investing, especially in emerging markets and commodity-producing countries, as well as being accelerated by computer-driven trading and hedge funds.

Investors are turning to other markets for investment returns and generating more foreign-exchange trading in the process, thanks largely to the ease of trading over electronic platforms themselves.

To illustrate this, IG Group recorded a 16 per cent rise in first-quarter revenues to £79m, compared with the same period last year. And its UK market, which traditionally provides more than half the group's revenues, grew 8.5 per cent to £42m. Its market in continental Europe rose 46% to £12.7m, dominated by Germany.

Investor interest in currency trading has become so huge and is so accessible that the US Commodity Futures Trading Commission, or CFTC, has just introduced new rules designed to protect the average man with an internet connection, a trading platform, an eye on a quick buck from immediately losing his shirt...

Their new rules now prohibit retail forex dealers from offering more than 50-to-1 leverage for major currencies such as the dollar and the Japanese yen or 20-to-1 leverage for more-exotic currencies. That means an investor putting up $1,000 can trade as much as $50,000. Previously, leverage of 100-to-1 was common. Hopefully this will stop so many newcomers getting so badly burned, so quickly.

It's not just investors, but funds of all descriptions - including hedge, mutual and sovereign-wealth - that are seeing the currency markets as a distinct asset class and not just a way to make an investment priced in another currency, reflecting a broader search for diversification, which has also led to increased investment in commodities, land and other assets beyond stocks and bonds.

The currency trading market dwarfs US stock trading, which in April averaged about $134 billion per day, according to data compiled by the Securities Industry and Financial Markets Association, with trading in US Treasuries averaging $455 billion per day in April, down from an average of $570 billion for all of 2007.

After three quarters of trading this year, we've seen stocks and commodities come full circle to the same prices they were at when we started 2010 thanks mainly to uncertainty.

This uncertainty has been compounded by upsets this year, like the euro zone sovereign debt crisis and a panic that the US was going to head into a second recession. But there have also been surprises, such as China's well-managed come-down from the adrenaline-needle-in-the-heart stimulus administered to its faltering economy in 2008, which has led to positive corporate results there, once more.

But it's emerging-market currencies that are now at the forefront of risk-hungry investors' buy orders, with the market share of 23 currencies growing to 14% in April, from 12.3% in the previous survey in 2007. There have been significant increases in demand for the Turkish lira and the Korean won, followed by the Brazilian real and the Singapore dollar.

The Australian and Canadian dollars have also seen their shares rise by one percentage point each to 7.6% and 5.3% respectively, buoyed by their status as commodity currencies benefiting from soaring demand for raw materials from China and other emerging nations. Their level of demand seems set to grow further as Brazil, India and China increase output.

And while the IMF calculates that China currently holds forex reserves of around US$2.45 trillion, nearly 30 per cent of the global total of US$8.09 trillion at the end of last year, it may be only a matter of time before Shanghai enters our coveted FX leader board, but they’re not going to be causing London any concerns in that department anytime soon.

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Mike Baghdady is running an Apprentice Programme to rival Richard Dennis' great Turtle Trading experiment of the 80s and is seeking applicants to join him, with no prior trading experience necessary. For more information, see: www.trainingtraders.com

 

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