By James Ramage, Katie Martin and Josie Cox
Currency-trading volume is shrinking at the fastest pace since
the financial crisis, the latest sign of the placid conditions that
have frustrated traders in markets around the globe this year.
The amount of money changing hands daily in foreign-exchange
markets on average fell about 8% in April compared with the same
period a year earlier, to $4.1 trillion, according to a survey by
six central banks released Monday. The drop was steepest in North
America, where volumes plunged nearly 20%. The survey covered about
80% of global currency trading.
Traders say opportunities to bet on big currency moves are few
and far between, as years of sluggish growth and near-zero interest
rates in the world's major economies keep some of the most heavily
traded exchange rates steady. Many investors remain on the
sidelines as they wait for more clarity in the Federal Reserve's
timetable for raising interest rates, which is expected to cause
major swings in the dollar's value against many currencies. The
Fed's policy committee may provide some direction on that when it
meets Tuesday and Wednesday.
Banks and hedge funds are feeling the strain from sleepy market
conditions. For the 10 largest global investment banks, trading
revenue in the fixed-income, currencies and commodities units that
comprise foreign-exchange trading plunged 15.7% in the first three
months of the year from the year-ago period, according to data from
Coalition, a consulting firm. Several large currency-focused funds,
including FX Concepts LLC, have shut down in the past year.
Investors say it is harder to make money trading currencies now,
and even some specialists say they are making fewer bets. At the
same time, there is rising concern that the torpor may point to
market complacency, which could lead to trading opportunities but
also potential losses for investors when currencies start to move
again.
"If a manager makes a poor trading decision, it may take a while
before he or she is given another chance to make the money back,"
said Luca Avellini, a partner on the FX desk at JCI Capital Ltd.,
which manages $105 million in currency investments out of a total
of $2.4 billion in assets. "In this sort of environment, for the
disciplined manager, the incentives to put positions on
[currencies] in the first place are very low."
JCI's strategies that draw from larger economic themes have
suffered under the lower volatility over the past two months, which
has led to taking fewer positions and using less leverage. JCI also
has made fewer short-term directional bets, Mr. Avellini said.
The data released Monday were compiled by central banks in the
U.S., U.K., Japan, Canada, Australia and Singapore. The central
banks take a snapshot of trading each April and October.
In North America, volumes fell to $811.1 billion from just over
$1 trillion in April 2013. In the U.K., the biggest
foreign-exchange trading hub world-wide, volumes fell 6% to $2.4
trillion.
Foreign-exchange traders and analysts report drab conditions in
the once-vibrant currencies market. Most major currencies have
barely budged this year, giving investors few viable trades
compared with assets such as commodities, which have been buffeted
by extreme weather as well as geopolitical tensions. That is a
change from April 2013, when the Bank of Japan embarked on an
unprecedented bond-buying campaign, sending investors piling into
bets against the yen.
The yen is up about 3% against the dollar this year, after
tumbling 18% in 2013. In North America, daily trading in the
dollar-yen currency pair fell 41% to $68.9 billion in the spot
market, according to the central bank survey.
One of the currency market's most popular bets early in the year
failed to pan out, leading to a lull in trading as many fund
managers exited the market, analysts say. Many funds had bet on a
stronger dollar, believing that healthy growth would convince the
Federal Reserve to raise interest rates earlier than anticipated.
But a harsh winter caused the U.S. economy to contract in the first
quarter, reducing the likelihood of a rate increase before
2015.
"Hedge funds were positioned for a breakout in the U.S. economy,
rising yields and a stronger dollar," said Ian Gordon, currency
strategist at Bank of America Merrill Lynch. After the market moved
against them, "they're waiting for stronger signals from the Fed"
before getting back in, he added.
Reduced trading also has squeezed banks, which have fewer
transactions to handle for clients.
"With very little happening in the FX market, there is less flow
going through market makers," said Saeed Amen, co-founder of
quantitative analysis firm The Thalesians.
To be sure, many investors and analysts expect trading to pick
up as the Fed nears a rate decision. The central bank hasn't raised
rates since 2006, and some traders expect the dollar to rise
against many currencies once the Fed signals it is preparing to do
so.
A strong U.S. jobs report on Friday could shake up the currency
market, as improving labor conditions could convince the Fed to
raise rates sooner than expected, said Ray Humphrey, a portfolio
manager on Canadian accounts at AllianceBernstein LP, which manages
$480 billion, including $266 billion in fixed-income assets.
"The Fed may need to change their tune," Mr. Humphrey said. "We
should see a big pickup in volatility and volumes."
Still, currency volumes are unlikely to pick up substantially
until central bank policies diverge more sharply in the U.S., euro
zone and Japan. Currently rates are near zero in all three areas,
reducing the opportunities to wager on one currency rising or
falling against another.
Citigroup Inc., the world's largest currencies-dealing bank,
noted in its research Monday that "FX volatility has plummeted"
over the last six months, although the bank envisages a pickup from
here.
Write to James Ramage at james.ramage@wsj.com, Katie Martin at
katie.martin@wsj.com and Josie Cox at josie.cox@wsj.com