Farewell European Finance?

The latest Bank for International Settlements survey of the global FX market offers some interesting insights into the development of the global economy. Currency trading is critical as a measure of market activity, since it encompasses all the deals between countries (assuming they have a different currency), whether for trade, investment, hedging or speculation. Deals are largely done between financial companies, but they also reflect the activity of non-financial ones and the economy in general. Between April 2013, the date of the previous survey, and April 2016, the latest one, the striking feature of the BIS report is the decline in the volume of currency trading for the first time in many years. On a net-gross basis (the measure used, there are others!), the volume of global FX trading fell by 2%.

The main casualty is the UK (basically, London) as a trading centre, although it remains by far the biggest in the world. The gainers in terms of market share are the US and Canada, but more significantly the Asian FX trading centres. To have a smaller share of a market in decline, as the UK has had, is a big problem for a previously lucrative financial business.

The UK's share of global currency trading fell from 40.8% in 2013 to 37.1% in 2016, a very sharp drop, although still above the level in 2010. Meanwhile, the US, in second position, rose by 0.5% to 19.4% from 2013 to 2016. The US rise in share nevertheless meant that its volume of dealing rose by less than 1% over the three years; the UK's volume fell by 11%. The UK decline reflects the weaker European economy and the related weakness in euro currency trading in London (some three-quarters of the total euro trading), while US banks were in a relatively strong position, but that was not saying much.

Overall, Europe's share of currency dealing fell between 2013 and 2016, not only due to the UK. France, the Netherlands, Luxembourg, Italy, Ireland and Switzerland also declined. Although Germany had a slight gain in market share over this period, its share in this financial business is minimal at less than 2%.

Asian trading centres are recorded as the winners from the latest BIS report. Despite the impact of the global crisis on 'emerging market' countries that are vulnerable to changes in developments in the world economy, several Asian trading centres have had success on this financial dealing measure. Singapore's share of the volume of trading rose from 5.7% to 7.9%; taken together, China and Hong Kong's rose from 4.8% to 7.8%. This is an astonishing result for China, especially, backed by the near-doubling of the use of the renminbi in global FX dealing to 4%, making it the eighth largest trading currency, just behind the more established Canadian dollar and the Swiss franc. Meanwhile, the euro slipped to its lowest share since its inception, to just 31%, while the US dollar rose slightly to 88% (note that with two currencies in each deal, the total shares add up to 200%).

Financial dealing is far from being a full picture of reality. But the shift in economic weight from Europe to Asia is a clear message from the latest BIS FX report, with the US holding its own. This is consistent with a wide variety of other economic assessments.

Tony Norfield, 1 September 2016