Marketplace Analysis with Mike Itegboje

A market fueled by leveraged investors, high-frequency trading strategies, and "carry" trades hardly sounds the most promising place for investment banks to focus their post-crisis energies. Yet foreign-exchange trading has continued to boom despite-and even thanks to-the turmoil in the financial system. Daily transaction volumes hit $4 trillion in April, up 18% from the last Bank for International Settlements survey three years ago. The pace of growth may fade as the crisis does, but high volumes are here to stay.
Foreign-exchange trading has kept growing partly because it meets many of the needs of investors with frayed nerves. It is an ideal tool for hedging macroeconomic risk at a time when trading in other markets like credit and even government bonds has seized up. And liquidity is hardly a problem in a market that trades the equivalent of 27% of U.S. gross domestic product each day. Electronic trading and narrower bid-offer spreads have made transactions quick and easy. As a result, trading by financial investors such as hedge, pension and mutual funds has risen 42% since April 2007, to average $1.9 trillion daily.
True, some of the activity in foreign-exchange could fade if the markets cease to behave in such a binary risk-on and risk-off fashion and macroeconomic hedging declines. But that could drive greater use by companies for cross-border investment, mergers and acquisitions, and longer-term hedging. And emerging-market currency trading is growing, boosted by structural shifts in investor demand and low rates in the U.S., Europe and Japan. Added together, that should help keep foreign-exchange markets busy.
That is good news for those banks that have invested heavily in technology and trading platforms, which, coupled with higher volumes, also allow them to offset more client trades internally rather than via the market. Even so, margins remain very thin in what is effectively a largely commoditized, utility market in which banks require huge client flows to generate returns above their cost of capital. And, despite many banks' efforts, competition is tough: Top-three players Deutsche Bank, UBS and Barclays have held on to their rankings and account for 40% of the market, according to finance publication Euromoney. But that won't deter others from trying to break in-if only to establish a foothold to win other, more-profitable business from clients.
Write to Richard Barley at richard.barley@dowjones.com
It has been two step forward three steps backwards as the all talk-no-action by the bank of Japan failed to stem the Yen appreciation. Exporters had been the hardest hit by the Yen rise by making their goods more expensive to foreign buyers and this therefore reduces the value of profits earned from oversea. One of those hard hit was Sony Corporation. The firm said that it is losing over $23.6million of annual operating profit for each one yen gain versus the US dollar. The Bank of Japan will therefore have little words left on August 31, 2010 when Industrial Production is due for release. A weaker than expected actual reading will leave the bank with no choice than to intervene in their currency. The last time BoJ intervene was in March 2004.
On the Currency market, we expect to see some weakness for the Yen as the prospects of an intervention by the BoJ heightens. The dollar however will continue to maintain its safe haven status and at such negative correlation between the US dollar and the US economy will mean that dollar will still appreciate by next week.
August 17, 2010
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Thursday, August 12, 2010

Commentary: Australia has outperformed the world for more than a century
By Howard Gold