1. What – or where – are the current opportunities in FX?
The search for yield is as marked in the FX sector as it is elsewhere. Just as fixed income volumes have been bolstered by a healthy growth in emerging markets (EM) business, emerging markets are being identified as the next big thing in FX.
Although the share of the global market represented by trading in emerging market currencies only rose from 4.5% to 5.2% in the period 2001 to 2004 covered by the latest BIS report, 46.42% of respondents to The Banker’s survey identified EM currencies as a key growth area for them and their clients.
“When you consider the populations of countries such as China, India and Russia [versus] their contribution to global FX turnover, the opportunities for growth are phenomenal,” says Jason Henderson, head of FX derivative trading at RBC Capital Markets. “These countries present attractive investment opportunities but, at the same time, there is a real need to hedge currency risks.”
Volatility in emerging markets coupled with an increasingly sophisticated response from investors and corporate clients to their FX exposures is driving demand for products such as options and short-term interest rate instruments.
“Even in less sophisticated markets like The Gambia, currency risk hedging is becoming an area of significant importance for corporate clients. We therefore see opportunities in FX forwards and options to hedge risks related to the import business,” says Lamin Drammeh, country head of global markets at Standard Chartered Bank Gambia.
The wider margins available in EM currencies are worth any additional risk, which is largely offset by more healthy economic outlooks, says Hussein El Maraghi, senior manager, treasury, at HSBC in Egypt. “The risk premium currently implicit in FX prices [in emerging markets] does not accurately reflect their improving economic potential,” he says.
Key areas highlighted by respondents were: China, south-east Asia, the Middle East, eastern Europe and Russia/CIS. Many are committing significant resources to build businesses in key countries, such as Svenska Handelsbanken, which last year became the first Nordic bank to open a subsidiary in Moscow.
The ongoing development of FX as an investment product continues to underpin significant growth. Combined with the emerging fund management businesses in eastern Europe and other less developed asset management and pension markets such as China it is seen as a clear expansion path for banks.
The provision of more complex or structured products – usually involving a mix of asset classes tailored to fit customer needs – are proving particularly popular. “Investment products combining FX with other assets are gaining in popularity with financial institutions and private bank clients,” says Frank Rawlins, head of FX trading for Europe at JPMorgan.
