|09 January 2018|
|SGX ends 2017 with record high Open Interest for FX Futures|
December usually sees thin liquidity as many financial institutions close the trading books with holiday season and year-end ahead. 2017 was no different in this regard, as liquidity in December was generally thin, with occasional spurts of activity. However, overall, the year was one of many aberrations.
Throughout the year, talk within the market of the US Fed raising interest rates threatened to spook the EM currencies, but ultimately failed to cause any real damage to the market. With a new President assuming office, the US markets had begun to rally at the end of last year. The expectation was that with a senate majority, new policy initiatives would unfold and strict regulations would ease, delivering on the campaign promises to boost the US economy and the global financial markets. We have since only seen one of these initiatives passed into law, with the passing of the US tax bill late in December 2017.
The US economy has grown stronger on most metrics despite the lack of any new or substantial US policy initiatives in 2017. However, the US dollar continued to remain weak for extended periods in 2017. Being short dollar has been termed a crowded trade, and yet, it has been profitable with most EM currencies defying expectations thus far.
Among key Asian currencies, only the Philippine Peso and Indonesian Rupiah have lost ground to the US dollar during the year. With two of the major growth economies, India and China, showing promise, INR and CNH have strengthened in 2017 and SGX has seen a massive pickup in the trading activity for the FX Futures of these currencies.
2017 was a significant year for the SGX as it reached several landmarks, including new volume and open interest records, and continued to grow the FX Futures business. A few of these landmarks are listed below:
Data Source: SGX
Overall, the trading volume for SGX FX futures increased by 59% in 2017, as enhanced investor interest in the key contracts took aggregate volume from 6,285,595 contracts in 2016 to 9,996,635 contracts in 2017. The increase in trading activity remained strong throughout the year and the overall FX futures volume grew each quarter.
The real acceleration came in the second half of the year with volumes in Q3, 2017 nearly doubling that of Q3 2016. This was a direct result of increased trading in the two key SGX FX futures contracts (INR and CNH) albeit both driven by different macro reasons. In 2017, SGX saw 126 trading days with trades in excess of US$ 1 billion for at least one of these two currencies.
The aggregate open interest for SGX FX futures at the end of each month remained stable for most of the year, before picking up pace in Q4. SGX ended the year with a new month-end high of 94,191 contracts in open interest for the FX futures. This represents a strong 30% growth m-o-m and 123% jump from 42,268 contracts at the end of December 2016.
Data Source : SGX
USD/CNH Futures cap the year with 270% y-o-y increase in volume
Looking back on 2017, the reality of the Chinese (and CNH) market was not consistent with the outlook presented by the analysts at the start of the year. Towards the end of 2016, news about China was not encouraging. The premium on the Sovereign CDS was rising; bond yields had been increasing; and after a stellar 2015, equity markets had seen corrections and the Shanghai composite had lost 12% during 2016. China’s foreign reserves, the world’s largest stockpile of the greenback, fell to a five-year low of US$ 3.05 trillion while the renminbi dropped nearly 7% against the dollar in 2016. With over 13% depreciation in the currency since the beginning of 2015, most analysts were bearish and had been forecasting another year of pain in 2017. The general view of most analysts at the time was that the currency would continue to weaken even as China opened up its economy in a controlled manner.
With that background, the positive market performance in 2017 may have confounded even ardent China watchers. Currency has appreciated 5.7%; the Shanghai composite is up while the risk premium measured by 5 year CDS is half of the levels at the start of 2017. China’s FX reserves have risen every month since February 2017.
2017 started with low volatility for the renminbi and it continued to remain range bound until May as a result of economic headwinds. As FX reserves started to pick up, the appreciation of renminbi also gathered pace.
The second half of 2017 saw tension in the Korean Peninsula build up, as the war rhetoric started to mount amidst nuclear tests by the North Korean regime. The usual expectation at such times would have been to see the US dollar strengthen and EM currencies weaken, with global portfolio managers redeploying capital to manage risks. However, the renminbi continued to strengthen with a newly found status as a safe haven currency. Market watchers had seen the inclusion of the renminbi in the IMF SDR basket in late 2016 as a positive step on the path of internationalisation of the currency.
The 19th party congress held in the last quarter of 2017 saw China outline an ambitious plan for the future to take on a leadership role befitting its status as the second largest economy in world. Late in December, the onshore renminbi rose to the strongest levels in more than three months as the PBOC boosted the reference rate for the currency amid thin liquidity. Over the year, the currency gained 5.7% against the US dollar.
The appreciation in renminbi over the year had a significant impact on the trading volume for SGX USD/CNH Futures as the trading activity increased in tandem with SGX seeing steep increase in trading volume for the USD/CNH futures in 2017.
At the start of 2017, the SGX share of the listed USD/CNH FX futures market stood at approximately 50%. SGX ended the year 2017 with 75.5% market share and aggregate volume for USD/CNH futures growing a phenomenal 270% over the preceding year. The total trading for the USD/CNH crossed US$ 190 billion [1,902,105 contracts] in notional value against US$ 51 billion [514,039 contracts] in 2016. The year also ended with the highest open interest seen at the end of any month [25,697 contracts] since the inception of the contract 3 years ago. The open interest for SGX USD/CNH futures has grown 29% m-o-m and it is nearly 42% above the levels at the end of December 2016 [18,051 contracts].
Data Source : SGX
The average daily volume (ADV) for USD/CNH in December was US$ 1.1 billion, making it the fourth month in succession where the ADV crossed US$ 1 billion and further consolidated the significant upward shift in growth trajectory of the contract seen in 2017. Liquidity continues to be strong with active interest from clients across geographies and with diverse business requirements. After crossing the US$ 1 billion mark in a single day for the first time in January 2017, the trading for SGX USD/CNH futures picked up even further, exceeding this mark on 54 days in 2017.
SGX INR/USD Futures shows a robust growth of 50% in 2017
Political stability is a cornerstone of emerging markets investments, as it tends to influence economic policies the most. Even if the other factors for development are abundant, the presence of political instability often leads to a policy paralysis, thereby stunting the economic growth potential. India has been a prime example of this phenomenon in the past. Despite confluence of factors such as burgeoning population, growing youth employment participation, increase in purchasing power and growth of credit, it has yet to fulfil its economic potential. However, this is changing and in the last few years we have seen several economic initiatives move ahead. This has been possible with a stable government at the helm. The introduction of a common tax code for businesses (GST) in 2017 is an example of a significant policy change expected to simplify the business process and be an enabler for economic growth. Institutional Investors have taken note of this policy direction and continued to route money to India in the last few years. India remained a favorite investment destination in 2017 as investors routed over US$ 30 billion in net flow to the country across different asset classes. Moody’s recognised this momentum and upgraded the investment rating in November.
The correlation between crude oil prices given its impact on fiscal deficit in India because of the subsidies and the rupee has been important for India-focused investors. The same generally holds true of the relationship between Foreign Portfolio Flows into Indian capital markets and the rupee. December saw both these aspects tested - the net portfolio flow was in negative as Foreign Portfolio Investments (FPIs) pulled money out of India, and the crude oil prices rose. Normally, both these factors would have applied downward pressure on rupee. However, the rupee appreciated nearly 51 paisa against the US dollar in the month. The currency appreciated 5.93% in 2017 and added to the gains made in the capital market by the foreign investors.
Data Source : SGX, Bloomberg
However, while the GST reform is likely to drive revenue growth in the long term, its short-term impact has been negative, as tax revenue from GST has fallen since the implementation of the new system remains a work in progress.. With the government likely to miss its revenue targets for the year, the sovereign bond yields have crept up nearly a 100 bp since July. Indian Sovereign bonds took a further hit on December 28, as the Indian government announced additional borrowing of up to 500 billion rupees in the financial year, stoking fears of a widening fiscal deficit and highlighting yet again the delicate balance that regulators need to strike between the investor’s requirements and their own. The impact of these changes on the currency markets tends to be significant and SGX has benefited from the spurts in volatility over the year.
Data Source : SGX
In 2017, SGX had 105 days where the trading volume of INR/USD futures topped US$ 1 billion while only 29 such days were observed in 2016. Despite thin volumes in December, as expected towards end of year due to holidays, SGX had 12 such days for INR/USD Futures. The total trading volume for the contract in December [709,780 contracts] was up 50% from the activity in December 2016 [474,766 contracts]. The full year volume for SGX INR/USD Futures was up 40% from 2016 as cumulatively, 7,955,136 contracts exchanged hands in 2017 against 5,666,369 contracts in 2016. On notional value terms, this translates to over US$ 245 billion in 2017 against US$ 168 billion in 2016.
As investors rolled their positions into 2018, the Open Interest for the SGX INR/USD Futures was 57,857 contracts at the end of December, representing a strong growth of 175% from 21,060 contracts at the end of December 2016.
Developing other FX Contracts
SGX continues to innovate its offerings to address the market requirements. In 2017, SGX introduced several new Futures contracts to meet the hedging needs of market participants for several ASEAN currencies.
Amongst the existing FX Futures offerings, KRW/USD volume has grown 96% in the year with total trades over US$ 1.4 billion in the year. While the product remains in a nascent stage of development, the growth in trading activity should make it an interesting offering for participants looking to hedge KRW exposure outside of Korea.
How to access information on these contracts:
Visit www.sgx.com/fx for more details on SGX FX Futures and Options.
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