Changes and trends in the rand foreign exchange market – Business Day

This global trend for trading to move out of the local jurisdiction to the international trading hubs must be of concern to the authorities. Domestic authorities have jurisdiction over trading activity that occur within their country’s borders (with the possible exception of the competition authorities). When trading moves to a different location, it becomes very difficult to monitor the markets for purposes of market intelligence and to investigate possible conduct transgressions.

For all market participants, the use of banks as the prime source of information on market movement may become problematic. Given their reduced market share, it will inhibit their ability to provide comprehensive information, while NBFI are likely to be less forthcoming with flow information.

It is therefore ironic that as global markets have moved to improved and more centralised pre-trade price discovery, the underlying flow analysis (post-trade analysis) may be suffering.


Trading patterns in the EM forex markets have changed quite dramatically since 2001. Trading volumes have shown strong growth, but trade is increasingly moving from the domestic jurisdictions to international trading centres. This geographic move is closely associated with an increase in the role of other financial institutions at the expense of the large trading banks and securities houses.

SA has not followed all the shifts in EM trading patterns. Growth in overall rand trading turnover was the lowest in the EM cluster; however, rand trading volumes as a percentage of GDP is much higher than its peers. As in the rest of EM, trading turnover of the reporting banks has declined in favour of NBFI. For rand trading, institutional investors and hedge funds, and proprietary trading firms, now make up an important part of the spot and outright forward markets.

The shift to international centres and the larger role of NBFI in trading provides challenges for policy makers and other authorities. Sourcing market intelligence for market-monitoring and policy-analysis purposes will become more difficult and will require a change in information-collection methods.

This is important for monetary and financial stability policy, as the assessment of risks must be based on a robust understanding of recent and expected market behaviour and pricing. The SA Reserve Bank will need to have a good network of contacts in the international centres with which they interact regularly to make sure their analysis is robust and accurate.

The shift to international trading centres is unlikely to have any major consequences for price formulation in the rand exchange rate as the rand forex price discovery always took place on global dealing platforms. However, as the role of banks declines and that of the NBFI increases, it is possible that the liquidity of the market may become more erratic due to the reduced proactive intermediation (also referred to as risk warehousing) by banks.

For the market conduct and other financial authorities, monitoring the markets will become more complex and require greater co-operation between different jurisdictions.

Market participants will also find it increasingly difficult to get good, quality insights into market flows and dynamics. While the increased use of electronic trading platforms will boost pre-trade price discovery, there will be a loss of underlying flow information. This may inhibit a clear understanding of market drivers and require a change in how market information is collected, though NBFI may be reluctant to share their insights. Overall, this means that the analysis of forex markets will become more complex and possibly less effective.

1 BIS. 2019. Triennial Central Bank Survey. 
2 The nine EM currencies included are the Brazilian real, Chinese renminbi, Hungarian forint, Indian rupee, Mexican peso, Polish zloty, Russian rouble, Turkish lira, and SA rand. Reporting on these currencies became compulsory in 2013 to better capture their offshore trading. Prior to that reporting was voluntary.
3 All percentage changes are annual compounded numbers from 2001 to 2019 unless otherwise stated.

• This is an extract from a longer piece done for clients of the Bureau for Economic Research.

• Myburgh is former head of financial markets at the SA Reserve Bank.

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