Investment banks are now earning more from trading emerging-market currencies than from the major G10 markets, as wild swings in the likes of the Turkish lira contrast with relative calm in the dollar, euro and yen. Disappointing earnings at the trading divisions of investment banks like Goldman Sachs underscore the slowdown in trading revenues, including forex revenue.
The slowdown is particularly acute in G10 currencies: the US, Australian, Canadian and New Zealand dollars, the euro, yen, Swiss franc, sterling and the Swedish and Norwegian crowns. Data compiled exclusively for Reuters by analytics firm Coalition show the 12 biggest investment banks made $8.4 billion in revenues from emerging-market forex last year, against $7.9 billion from G10.
Coalition data go back only to 2010, but Coalition's head of research, George Kuznetsov, said that before 2010 emerging-market revenues would always have been lower than revenue from trading the major currencies. "Emerging markets had an exceptional year," Kuznetsov told Reuters. Preliminary data for the first quarter of 2019 suggest emerging markets were again outperforming - G10 revenues are down nearly 10 percent; developing-market revenues are flat or marginally lower, Kuznetsov said.
"In 2019, I would expect relatively similar, but it will be difficult to exceed 2018 levels," he said. Trading in G10 currencies was likely to rely on "one-off" volatility, he said. Emerging-market forex revenue in 2018 was the third highest since at least 2010, according to Coalition; G10 revenues were second worst. Foreign exchange revenue overall topped $16.3 billion in 2018, the fourth worst year in nine, Coalition said.
Forex earnings are being squeezed by declines in trading volumes and volatility. Banks wring more money from volatile markets, as clients trade more. But currency volatility has plummeted to five-year lows as major central banks, from the United States to New Zealand, turned dovish. For example, the euro/dollar exchange rate - the world's most-traded currency pair - has just seen its narrowest quarterly trading range since the single currency's inception.
"There doesn't appear to be a major direction (in G10 markets) at the moment, and volumes are down," said a senior foreign exchange trader at a European bank. "It feels very competitive.
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