Earlier today, I brought you the latest from the BIS, the central bank for central banks.
In its latest quarterly report, the bank takes a look back at the events that have transpired over the past two months or so and how those events have helped to recreate the taper tantrum on the way to driving up bond yields and triggering five standard deviation moves in multiple markets followed by abrupt reversals predicated on the president elect’s supposedly conciliatory victory speech.
In another portion of the bank’s report, researchers found that “for the first time in 15 years, FX trading volumes contracted between two consecutive BIS Triennial Surveys.” Here’s more:
The decline in trading by leveraged institutions and “fast money” traders, and a reduction in risk appetite, have contributed to a significant drop in spot market activity. More active trading of FX derivatives, largely for hedging purposes, has provided a partial offset. Many FX dealer banks have become less willing to warehouse risk and have been re-evaluating their prime brokerage business. At the same time, new technologically driven non-bank players have gained firmer footing as market-makers and liquidity providers. Against this backdrop, FX trading is becoming increasingly relationship-driven, albeit in an electronic form. Such changes in the composition of market participants and their trading patterns may have significant implications for market functioning and FX market liquidity resilience going forward.
Perhaps more interesting is the bank’s updated take on the renminbi which has now grown to account for some 4% of daily global FX turnover eclipsing the Mexican peso and nipping at the heels of the Swiss franc and the loonie. For those interested (and that should be everyone given the rising importance of the yuan in global trade and commerce), here are the details:
The rise and financialisation of the renminbi
Renminbi turnover has approximately doubled every three years over the past decade and a half (Graph B, left-hand panel). Total daily turnover has reached over $200 million or 4% of global FX turnover. This makes the Chinese currency the eighth most traded currency in the world, overtaking the Mexican peso and only slightly behind the Swiss franc and Canadian dollar.
Along with the rise in the overall trading of the renminbi, its use as a financial instrument and to back financial rather than trade transactions has also increased. In the past, most of the limited turnover was in spot transactions. The Triennial reveals that spot now amounts to less than half of total turnover, while the share of FX swap trading has reached 40%. Associated with this, trading among financial institutions is now much more prevalent, while the share of renminbi trading with non-financial customers has declined steeply, from 19% in 2013 to 8% in 2016 (Graph B, centre and right-hand panels). However, the prominent role of the CNY/USD pair has not changed: 95% of renminbi trading is against the US dollar, and there is no serious liquidity in any other CNY pairs.
Renminbi trading volumes are growing rapidly, and the currency is becoming more financialised. The share of derivative compared with spot trading, and of financial compared with non-financial counterparties, are approaching that of well established and liquid currencies. Also, according to McCauley and Shu (2016), in line with RMB internationalisation, trading in offshore deliverable RMB forwards increased significantly, while that in non-deliverable forwards declined since the last survey. However, there are still impediments to the renminbi becoming a truly international currency. In addition to the low liquidity outside the CNY/USD pair, these include capital controls, the wedge between the offshore and onshore exchange rates, and ineligibility for CLS settlement. At the same time, the rapid growth of renminbi trading and the development of the associated financial markets (Ehlers et al (2016)) suggest that these hurdles may be cleared faster than might be expected.