Daily Management Review

London FX Market Shares of Sterling Suffer The Uncertain Brexit Woes


02/23/2019


Even though there has been an increment in the trading volume lately, sterling shares remain 30-40% lower.



With the Brexit discussions being dragged on, the “the world’s biggest forex trading centre”, sterling’s London “trading volumes” are suffering under the “long-term averages” while the sovereign players as well as the long-term investors are likely to remain “on the sidelines” till the crisis meets an end.
 
With the approaching decided time of March 29, being the official exit of Britain’s from the block, the pound’s trading volumes have moved upward from the beginning of 2019. However, last year “virtually every one of the world’s major currencies” registered an increment in the market share, while interest in sterling trading also “tailed off”. The said drops indicates a clear reluctance on the investors’ part to trade in British assets which could be a contributing factor to the volatile situation with sterling.
 
The Head of Foreign Exchange Sales for “Europe, the Middle East and Africa”, at Nomura, Fabrizio Russo said:
“A lot of people... have increased exposure (in recent weeks) though sterling volumes are about 40-50 percent lower than pre-Brexit roughly on an average”.
 
Even though, London sees dollar/pound as the “second-most traded exchange rate”, the daily average turnover figures had slipped down to “$324 billion” in October 2018, whereas it was at “$351 billion” in April 2018, revealed the Bank of England data. The currency market’s size seems to have broadened in the last four years’ time while the pound’s market share suffers stagnation as well as drop “against some currencies”.
 
As per BoE data, the exchange rate of pound/dollar dropped from 12.9% to 12.4% in October 2018 while euro/pound experienced a 2.5% decline. In pre-Brexit referendum period, the market share of euro/pound was at 2.6% in June 2016 while it touched the peak at 2.9% in October the same year.
 
Due to the decline of euro/pound, Chinese currency has also gone ahead of it in London with 2.8% market share. Moreover, the investors are avoiding volatile market options are more and more inclining towards “derivative markets to hedge sterling bets”. Furthermore Reuters added:
“Because the pound has become more susceptible to Brexit headlines, companies and some institutional investors have taken to the currency forwards and swaps markets to execute their currency needs rather than executing them via cash markets, a head of trading at a European bank in London said”.
 
However, the recent expectations of arriving at a Brexit solution seem to have kindled some “interest in sterling”, while pound’s “average daily volumes” have hit a decent “$65 billion in January” 2019, while the respective figures in December 2018 were at “$64 billion”. Nevertheless, the pre-Brexit “daily average volumes” used to touch “as much as $100 billion”, revealed CLS data.
 
In fact, the equity market of the U.K. too seems to be declining as “allocations fell last month to the second-biggest underweight on record”, showed the survey of “Bank of America Merrill Lynch’s fund manager”. In the words of a Senior Economist of CME Group, Erik Norland:
“The (recent) rise in volume probably reflects the tension between a fundamentally undervalued currency and the uncertainty surrounding or need to hedge the Brexit outcome”.
 
 
References:
reuters.com







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