Revised Post #5: FOREX Market Remains Dominated by European Movements

Thesis:  After over 2 months have passed, recent European movements are still creating tremendous changes in the US foreign exchange market and banking sector at large. 

The start of the European Central Bank’s version of quantitative easing and the Swiss central bank’s abandonment of its peg to the Euro sent foreign-exchange markets into a whirlwind of activity and volatility that banks need to juice up their trading sectors.

Volatility in the currency markets, which tends to drive sales and trading activity, has risen drastically over this first quarter. Setting the stage for a rebound at banks, particularly like those that deal heavily in those products, like Goldman Sachs.

According to the Wall Street Journal:

“Banks tend to make more money when markets jump around, assuming the moves aren’t so sharp that they scare investors away or cause the banks’ to write down the value of their inventories. Moves likes the ones in the first quarter often prompt investors to change strategies and buy and sell securities through banks’ trading desks. The banks generally charge for such trades.”

At nearly 9%, the foreign exchange market is set to play a major role in the fixed income, currency and commodities sector, according to Goldman Sachs reports.  However this quarter, given the enormous news and outsized influence in the foreign exchange market, it may as well be called the currency & co. sector. Despite this, the banks may be a bit hurt by the weakness of the trading in corporate bonds and credit related instruments, which could hurt banks more dominant in those products like Morgan Stanley and Bank of America, and not achieve as much

Interestingly, the strength in currency this quarter could make this the first period in six years in which first-quarter markets revenue rise on a year over year basis.  Not to be too much of a chartist, but this is especially important because of the first quarter’s indication of yearly performance.

All this good news aside, there may be a bit of news that has remained a little too quiet recently. According to the Wall Street Journal:

“The strength in currency trading comes amid an investigation into banks over their foreign-exchange practices. A group of banks including J.P. Morgan and Citigroup are in negotiations with the U.S. Justice Department over allegations the banks manipulated foreign-exchange rates. The banks have said they are cooperating with the investigations.”

Fortunately, the investigations by the Justice department have brought about new regulations into the Forex market. The world’s major central banks have agreed to a new set of guidelines for the foreign-exchange market, creating a road map for how individual countries’ regulators should protect client information. The new guidelines establish that it will be the banks’ responsibility to implement policies which control communication between traders. These policies should “require their personnel to refrain from passing on information that they know or suspect to be misleading,” according to the document.


One thought on “Revised Post #5: FOREX Market Remains Dominated by European Movements

  1. Chang Tian

    I totally agree with your opinion that volatility in ForEx market boosts trading market while hurts banks more dominated in corporation bonds and credit instruments. As you mentioned at the end of your post, some claim that commercial banks manipulate ForEx market to gain profit, do you think it was European movement or these manipulation from banks that mostly affected the volatility in US ForEx market recently?

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