Currency-Trading Revival May Take Years After Slide

July 28 (Bloomberg) -- Currency-trading volumes may take years to recover after a plunge in risk appetite sparked by the global financial crisis drove away hedge funds and speculators, according to foreign-exchange analysts.

Daily trading in London dropped 25 percent in April from a year earlier, with volumes in North America slumping 26 percent, according to surveys released yesterday by the Bank of England and Federal Reserve Bank of New York. Trade in Tokyo slid 16 percent, data compiled by the Foreign Exchange Market Committee in Tokyo showed.

The collapse of Lehman Brothers Holdings Inc. in September sent markets into a tailspin, prompting a flight from higher- yielding assets into currencies considered a refuge such as the dollar and the yen. While risk appetite is reviving on speculation the worst of the recession is over, a return to pre- crisis volumes won’t happen soon, said Geoff Kendrick at UBS AG.

“It’s probably going to be a multi-year adjustment process,” said Kendrick, a strategist in London at the bank, the world’s second-biggest currency trader, according to Euromoney Institutional Investor Plc. “Hedge funds have been impacted the most.”

The drop in London trading was “largely accounted” for by a 28 percent decline in spot trading, the Bank of England said.

U.K. Trading

The dollar was the most heavily traded currency with an 84 percent share of U.K. turnover in April, according to the Bank of England survey. The euro’s share declined to 45 percent from 48.6 in October, while the pound’s proportion was unchanged at 18.7 percent. As two currencies are involved in the transactions, the sum of the proportions totals 200 percent, the bank said.

Foreign-exchange trading rose to .2 trillion a day on average in the three years prior to the Bank for International Settlements’ September 2007 triennial survey.

Lower volumes in foreign-exchange markets contributed to bigger price swings as liquidity dropped, according to Ulrich Leuchtmann, head of foreign-exchange research in Frankfurt at Commerzbank AG, Germany’s second-biggest lender.

Currency trading may be reviving, said Satoru Ogasawara, a foreign-exchange analyst and economist at Credit Suisse Group AG, the largest Swiss bank by market value.

“Trade is gradually improving, which should be very supportive of the foreign-exchange market,” said Ogasawara in Tokyo. “The worst period is over and the decline in volume in foreign-exchange trading has hit bottom.”

Source | Forex Update | http://adeel-forex-update.blogspot.com/2009/07/currency-trading-revival-may-take-years.html

Long Term Forecasts: Ten years ahead.

By B. Hathi , 08/ February /2012.

My most recent effort was to try and produce a very long term forecast. I wanted to see if I could generate a 10-year view on currencies from the various scenarios that have occurred, and led to the present FX valuations.

The concept I used was that it is reasonable to assume that varying time intervals represent different scenarios. For example, the last 4-5 years equate to what many call the “new norm” following the Lehman’s collapse; the last 8-10 years gives the boom and bust in many carry trade currencies; by going further back in time, we bring in the effects of pre-dotcom equity bubble, East Europe break up, oil crises etc. By taking such individual scenarios in turn, I carried out a large number of forward simulations – by large I mean; 100 trials per day x 2500 days ahead (a trading year roughly consists of 250 trading days) and repeat the process a further 100 times. This gives a grand total of 25, 000, 000 simulations per currency per scenario. I used 5 input scenarios, so the value of each currency pair will be ‘guessed’, using different assumptions, a total of 125 million times over a period of 10 years.

Clearly, processing such large volume of data needs careful considerations and the outputs must remain simple enough to understand – the first output is the probability of higher versus lower values; the second is the mean value; and the third (and perhaps the most important) output is the probabilities of the central forecast range, i.e. the relative likelihood of a currency moving by, say +10% and -10% about its present value.

As an example, I am attaching a 60-day forecast plot of Gbp/Usd to demonstrate how forecasts propagate over a short time of 3 months. 

Figure 1: shows how the Pound's value versus the US Dollar might propagate over the next 60 days (3 months) from 08 February 2012. This plot shows that the uncertainty in Pound's value grows as we go further away in time from its present value.

The main output from my simulation software is available in the format presented below:

FX pair =	GBP/Usd
Forecast date =	08 / Feb / 2012
Forecast validity =	60 days (3 months)
Current value =	1.5918
Future (average) value range =	1.580 to 1.600
+/- 5% swing in value covers:	75% of the forecast range.
Probability of FX going up (over the full forecast) range# =	46% to 50%
Probability of FX going up (over +/- 5% of forecast) range# =	-7.11% to +0.23%
# values below 50% or negative percentages indicate a greater chance of the FX pair falling.

Unfortunately such long term forecasts are expensive and not suitable for individuals. These forecasts are primarily aimed at company (or a corporation’s) Treasury Risk Management units.
Contact the author for pricing information.

Source | The Currency Forecasting Blog (CFB) | http://currency-forecasting.blogspot.com/2012/02/long-term-forecasts-ten-years-ahead.html