How ‘speculative’ is the AUD (and other currencies)?

November 11th, 2010

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Recently, we took a look at this report from the Bank for International Settlements (BIS). The average daily foreign exchange turnover (including derivatives) is around US$3.9 trillion. The Australian dollar is the 5th most traded currency (at 7.6% of volume).

So, roughly AU$300 billion of AUD are turned over daily. Of that, US$249 billion of the trade is in the AUD/USD currency pair alone.

Now, let?s take a look at Australia?s balance of payment data. If you take the last 4 quarters of import and export volume, approximately AU$500 billion worth of goods/services are traded in one year.

Compare the amount of AUD that is traded daily in the foreign exchange market and the value of the import/export in one year. What do you see?

Mind you, we are just taking the AUD as an example. The volume of daily turnover in the foreign exchange (for all currencies) far exceeds the value of import/exports. If you look at the report from BIS, between 2004 and 2007, turnover increased by 73%! No wonder forex trading has now become a cottage industry.

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  • Richard

    Good grief! No wonder everyone has been talking about forex trading. Anyone trade forex here? Is it easy to make money from forex speculating?

  • Steve Netwriter

    Banks make money (create it out of thin air), traders simply move it around.

  • 5th most traded – wow. AUD is the favoured currency for carry traders. With interest rates on the way up here, rate differentials offer a free yield to FX speculators all over the world. Although, all this money sloshing around FX markets is real threat to our physical economy. The game of risk on / risk off will continue to throw the AUD around like a rag doll until this system is overhauled. Unfortunately many honest businesses, importers and exporters are now forced to go to the banks and cough up fees to hedge currency risk. Otherwise, operating an import / export business is akin to a day at the races.

  • DavidL

    It is often a little misleading to compare statistics like this. They seem to about something similar, but one is trade in “things” and the other is trade in paper. One measures something that relates directly to the real economy the other indirectly (but obviously impacting the real economy). If a few traders in New York and London are passing the same AUDollars back and forth many times a day, everyday of the year you can get a high reading on FX trades but on the other side of the world no more money is leaving or entering the country than if the traders were just sitting on their holdings instead of trading them. So what really matters is where and how that money is deployed, if it is just moving around the rest of the world, or even moving around the AU banking system with different owners names attached, does it really mean a lot?

  • Pete

    If those few traders are trading between themselves, they are both sides of the trade?

    How do you make money that way? Sounds like a zero sum game.

    However, if you are suggesting that large sums of FX money is being traded globally then I agree. And I think Australia is the ‘flavour of the month’. Nothing more really. Perhaps it is a play against the US? Not sure. But I would certainly think it is a play that involves China.

  • Pete

    Agree.

  • It goes to show that the ‘fundamentals’ for currency value is irrelevant. It is often said that the AUD is say, 20% “overvalued.” Pundits who say that probably mean that based on purchasing power parity (the ‘fundamentals’), the AUD is overvalued.

    Since the currency trading overwhelms the currency exchange based on imports/exports, then it goes to show that the real economy takes its exchange rate from the traders/speculators rather than the other way round. Ultimately, this means that it is the vast movement and shuffling of money that determines the ‘fundamentals.’

    I think this is what Hugo Biegold meant when he wrote,

    Unfortunately many honest businesses, importers and exporters are now forced to go to the banks and cough up fees to hedge currency risk. Otherwise, operating an import / export business is akin to a day at the races.