Foreign exchange & derivative activity Australia 2004-2007

Maybe the level of foreign exchange and derivative activity makes sense given Australia’s expanded role in the world economy but the numbers look large and the growth rates are huge.

Total turnover has more than doubled, and has increased across all instruments, counterparties and currencies. In terms of global turnover, the Australian foreign exchange market is the sixth largest in the world and the AUD/USD is the fourth most traded currency pair. These rankings are unchanged from the previous survey. The combined volume of transactions in foreign exchange and derivatives markets was $200billion per day in April 2007 with our foreign exchange market constituting 4.2% of the world’s market.

Sufficient reason I guess for training thousands of finance undergraduate finance students each year in the Australian universities. Students who know very little economics but are expert on hedging and speculating. Has anyone calculated the net contribution to national output of this activity? Is it summarised by the value of the incomes of the dealers?

The RBA Report that:

1. Foreign Exchange

Turnover in the foreign exchange market covers all transactions in spot, outright foreign exchange forwards and foreign exchange swaps.

In April 2007, foreign exchange turnover averaged US$170 billion per day, compared with US$81 billion per day in April 2004. This is a 90% increase at constant exchange rates.

Transactions in the spot market grew by 74%. Activity in the outright forwards market increased by 190% and in the foreign exchange swaps market by 120%. Foreign exchange swaps continue to represent the highest share of foreign exchange turnover, comprising 65% of the Australian market.

The AUD/USD is the most traded currency pair in the Australian market, accounting for 45% of total foreign exchange turnover, a similar proportion as at the time of the previous survey.

Transactions between local financial institutions increased by 387% and now account for around 30% of all turnover. Transactions with overseas financial institutions, which account for over 60% of turnover, rose by 69%. Transactions with non-financial institutions rose 93%.

2. OTC Currency and Interest Rate Derivatives

Turnover in derivatives covers all transactions in OTC options and cross-currency interest rate swaps.

In April 2007, total derivatives turnover in Australia averaged US$30 billion per day, compared with US$18 billion in 2004. This is an increase of 52% at constant exchange rates.

Transactions in interest rate derivatives, which account for the bulk of total derivatives turnover, grew by 77%. Within this category, turnover in interest rate swaps grew by 166% while turnover in forward rate agreements fell by 36%.

Transactions in foreign exchange derivatives grew by 39%. Within this category, transactions with both currency swaps and options contributed to the increase.

Derivative transactions with overseas financial institutions increased by 83% to US$20 billion per day, and account for 70% of all derivatives turnover. Transactions with non-financial institutions increased by 87% to US$4 billion per day, while transactions with local financial institutions increased by just 9%.