A report for Reuters by data analytics company Coalition has revealed that emerging market currencies achieved a greater yield than G10 currencies for the first time in 2018.

For the full year 2018, emerging market foreign exchange trading at the 12 biggest investment banks achieved revenues of $8.4 billion, against revenues from the G10 currencies of $7.9 billion.

The G10 includes pounds sterling, the US, Canadian, Australian and New Zealand dollars, Swedish and Norwegian crowns, Swiss franc, yen and the euro.

Previously in the data series, which tracks back to 2010, the G10 had always yielded greater revenues than that year’s emerging markets forex trading.

And although the analysis only goes back as far as the start of the decade, Coalition’s head of research George Kuznetsov claims that the G10 currencies would have always come out on top prior to that too.

He told Reuters: “Emerging markets had an exceptional year… In 2019, I would expect relatively similar, but it will be difficult to exceed 2018 levels.”

But early data from the first quarter of the year show the trend continuing to an extent, with revenues from G10 currencies down by almost a tenth, against flat or only marginal losses from developing markets.

The calm vs. the storm

The reversal of fortunes has developed from the contrast between relatively becalmed G10 currencies, and greater volatility – therefore greater revenue potential – in emerging economies.

Examples include the Turkish lira, which posted wild swings in recent months, while major currencies including the euro, dollar and yen all traded fairly flat.

A reduction in forex revenue is just part of wider deceleration in trading revenues at the big investment banks like Goldman Sachs, as seen in relatively disappointing earnings posted by their trading divisions, says Reuters.

This again is particularly notable in the G10 currencies – but emerging market currencies are by no means at a historic high in terms of revenues either.

In 2018 revenues from developing economies posted their third-highest total since the Coalition data series began in 2010, while the figure for the G10 was at its second lowest over the same period.

The poorer performance of G10 economies meant total revenue from forex trading stood at around $16.3 billion, making 2018 the fourth worst year out of the nine on record.

Downward pressures

Reuters cited several downward pressures on foreign exchange revenues, including:

  • Declining trading volumes.
  • Five-year lows in volatility.
  • Historically narrow trading ranges on the euro/dollar rate.

This last point is significant, as the euro and the dollar are the most frequently traded currency pair on the planet, yet recently posted their narrowest trading range of any quarter since the euro was created.

Lower volatility across the board leads to lower trading volumes, which decreases the opportunity for the banks to make their money out of the market.

And this has not been helped by the dovish approach taken by several of the central banks in the G10, including both New Zealand and the US.

One unnamed senior forex trader at a bank in Europe told Reuters: “There doesn’t appear to be a major direction at the moment and volumes are down. It feels very competitive. People are fighting for market share.”

Emerging volatility

While the G10 circle of currencies is adrift in a calm sea, emerging markets are still making waves.

August 2018 saw a currency crisis in Turkey that led to several months of volatility in the forex value of the Turkish lira.

Elsewhere, politics had an effect – the value of the South African rand swung more widely ahead of elections in the country, while political change in both Brazil and Mexico led to sharper moves in the value of the real and peso respectively.

Technology plays a part too, as currencies in emerging economies may be traded by phone, unlike in the G10 where automated systems – which themselves are expensive to set up – are increasingly responsible for making the actual trades.

How are the banks adjusting?

There are indications that the banks expect this trend to continue far beyond the current quarter.

Valentijn van Nieuwenhuijzen, CIO at NN Investment Partners, a Dutch investment house, told Reuters that the value of the dollar is being kept within a certain range because expectations of the Federal Reserve’s policy decisions have “solidified for the medium term” whereas “emerging markets offer opportunities and we are seeing pockets of value”.

Meanwhile in London, those in the industry tell Reuters that the major banks have been cutting back on their G10 trading teams, while holding or increasing the size of their emerging market forex teams.

The value of forex in volatile emerging markets could be useful for the banks, as Reuters noted that greater volatility does not typically bring greater revenues in asset classes including credit and others.

Reuters graphic/chart:


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