Average daily volumes in the global foreign exchange market rose almost 12 percent in August, data from FX settlement system CLS showed on Monday, driven by a return of market volatility. Volatility, for months at long-term lows, has surged on the back of a growing divergence between monetary policy and interest rates in the world's biggest economies.
The value of all transactions through the CLS system, which is used almost universally by the banking industry to process or settle trades, rose to $4.90 trillion a day in August from $4.71 trillion in July and was up 11.9 percent from than August 2013. Trends in the currency option market in the past few weeks suggest that the cost of hedging against sharp currency swings is rising as the most actively traded pairs break out of recent ranges. That bodes well for overall volumes, traders said.
The dollar index, which measures the greenback's performance against a basket of currencies, is at its highest since July 2013 on expectations that the Federal Reserve may start to tighten policy next year. In sharp contrast, the European Central Bank last week cut rates to new lows and launched an asset purchase programme, driving the euro to a 14-month trough. The Bank of Japan is also expected to keep monetary policy ultra-loose to ensure inflation reaches its 2 percent target.
With the Fed inching towards tightening, US Treasury yields are likely to climb and help the dollar. For most of this year, bond yields and rates have been anchored, crimping arbitrage between the most liquid currencies and offering little incentive to traders and investors to take positions. Daily currency trading volumes on one platform provider - EBS, owned by ICAP - rose to $85.5 billion from $70.6 billion a month ago, the company said last week. Average daily volume, as submitted to CLS and combining settlement and aggregation services, was, 1,035,978 up from 926,174 in July.
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