Forex Revenues Drop As Volatility Sinks To A 5-year Low

on Nov 16, 2012

Foreign exchange was the only financial market that remained seemingly unaffected by the financial crisis in 2008. From 2008 to 2010 Forex divisions at investment banks have been in the spotlight, reporting record revenues and profits due to investors trying to use the currency market to offset losses incurred elsewhere. But according to The Financial Times, this year saw a significant retreat in investors’ interest in the market, which has led to shrinking revenues reported by FX divisions. Coalition, an independent investment banking and financial services analyst, estimates that for the first three quarters of 2012, the sector’s revenue has shrunk to $5. 7 billion – a 23 percent decrease from the $7.3 billion in revenue recorded over the same period last year.

**Interest fades as central banks continue to intervene**
Investors have been losing interest in forex for some time now, with the continuing interventions from central banks making the market notoriously hard to predict one of the main reasons for this. The official sector’s recent penchant for easing of monetary policy has damaged many of the practices used in currency exchange, making trading currencies against each other, catching trends and making profit very difficult. This has driven the market to a 5-year volatility low, forcing investment banks’ forex divisions to employ much more competitive prices in order to lure investors back.

**Forex divisions report dropping revenues**
The current situation represents a serious blow for investment banks. Their forex divisions, which, for quite some time now, have been their star performers, are now turning in lower revenues and profits compared to previous years.
!m[](/uploads/story/834/thumbs/pic1_inline.png)HSBC (HBC:NYSE) reported a decrease of 20 percent in Forex revenues in the third quarter of 2012 compared to the same period last year.

Barclays (BCS:NYSE) also hinted at poor results in its forex department, saying that lower forex contributions had offset an 11 percent rise in its FICC (Fixed income, currency, commodities) division over the same time period.
Deutsche Bank (DBK:BER), the eurozone’s largest bank by assets, has also experienced a drop in Forex revenues in Q3, according to bank insiders, despite its record high volumes for the same period.

One of the few banks to avoid this negative trend has been Citigroup (NYSE:C), which, according to bank insiders, has managed to record higher revenues from its Forex department. However, most of the gains have to be attributed to the emerging market units, which are included in the bank’s Forex division.
**Demoted to supporting act**
In its star years after the 2008 crash, FX divisions quickly earned the status of investment banks’ top performers. Currency trading has proven to be stable in the post-2008 climate, remaining one of the most profitable client-related areas of fixed income. 2008 in particular was the best year on record for many forex divisions, which recorded significant profits due to increased interest from investors.

But with investors’ interest slowly diminishing, foreign exchange divisions might be pushed into the background. Kevin Rodgers, head of Deutsche Bank’s FX unit commented that “We’re back to being a solid contributor but relatively speaking it’s not the starring role it was.” Judging from his words and the sector’s poor performance recently, it seems that the leading role has been passed to someone else.


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