Last Updated: 21 May 2023
There’s no Great Recession in the world’s FX markets. But who’s making the money?
According to the Bank for International Settlements (BIS), quoted in today’s Financial Times, the global foreign exchange market now turns over US$4 trillion daily, up from US$3.3 trillion three years ago. So while equity volumes (and index levels) remain depressed when compared with the world as it was pre-Lehman, FX market traders must be breaking out the champagne.
My “football shirt sponsor” indicator hints at the money flow to FX trading concerns. International “retail forex broker” FxPro starts the 2010/11 English premier league season as sponsor on two teams’ shirts, those of Fulham and Aston Villa.
Talking of following the money, loan sharks Wonga – famous for their payday loans at 3000%-plus interest rates – are in the football shirt sponsorship business too (with Blackpool), as is a roster of online betting firms like 188BET, SBOBET and Sporting Bet (gambling and gaming sites sponsor five clubs’ shirts).
Cash-hungry football players and club owners, real-time online betting and multiple opportunities for match-fixing – it all sounds like a very unhealthy combination. Pakistani cricketers, anyone? (And English and Australian too, I should add.)
But perhaps the average football fan is happy to take out a £100 five-day loan at a 3253% interest rate to buy his match ticket and have a little left over to gamble online while at the game, even if some of the players may be trading on inside knowledge.
Returning to forex, with firms like FxPro offering leverage of up to 500:1 to retail punters, it’s perhaps unsurprising that the BIS is seeing global currency turnover rise. However, the life expectancy of the average FxPro client must be extremely short. At that leverage ratio a 0.2% move in a spot rate will wipe you out.
By comparison with the mind-boggling riskiness of some of these ventures, currency exchange-traded products are utterly boring. There’s little or no leverage, simply an opportunity to move funds easily from one currency base to another (for example, with ETF Securities’ currency ETCs) or to invest in different currency strategies (via db x-trackers momentum, carry and valuation funds).
In currency ETCs, investors appear stubbornly bullish on the dollar against the euro and yen, as we reported three weeks ago. Meanwhile, db x-trackers currency valuation ETF has done the best over the two and a half years since its launch, adding nearly 30%, while the momentum ETF is up 14% and the carry ETF is down 14%. Currency carry strategies (which borrow in low interest rate currencies to invest in high ones) took a big hit in late 2008 after years of steady gains.
Remembering that gold is a currency too, it’s worth pointing out that gold ETCs have done better still. ETF Securities’ Physical Gold ETC (LSE: PHAU) is up 32% since the date of db x-trackers currency ETFs’ launch. Gold tracker assets also vastly outweigh those invested in other currency ETPs.
So while the world’s currency markets offer plenty of trading “opportunities” with the type of leverage and froth that suggest the credit bubble never happened, there’s also a respectable list of more sober FX investment products to choose from, ones that don’t promise to immediately part you from your money to enrich the provider.
If an exchange-traded product firm ever gets into the football shirt sponsorship business, it might be time to start worrying, though…