The Asian foreign exchange markets have improved significantly over the last few years. The volumes have seen high growths with market participants becoming more diversified. Development of these markets is largely linked to the participation of foreign investors in the local markets. One reason that limits such foreign participation is the absence of liquid derivatives to hedge the currency risks. Multiple currency traders evade the related risks to protect their returns against the volatility of these markets.
Rapid Turnover Growth
- During the recent years, the Asian currency markets have grown at significant rates.
- Growth during the period from 2001 to 2004 recorded is at 50%; in comparison the growth between 2004 and 2007 was 130%.
- Turnover for all currencies has increased but there are marked differences among the various currencies.
- The highest growth was recorded for the CNY with lowest growth seen in KRW.
- Hong Kong Dollar continues to remain the most actively traded currency.
Reasons for Growth
- Growth primarily attributed to the increase in the trading of financial assets.
- Long-term foreign investors diversifying into these currencies to improve returns on their portfolios.
- Additionally leveraged investors with short-term investment duration flocked to the Asian foreign exchange market by the possible returns offered by carry-on trades.
- Spot market growth was fuelled by the high-frequency algorithmic trades executed by investors like investment bank.
- Countries, such as India and China experienced fast growth. Visit iFOREX India to know more about online forex trading.
- Asian forex exchange turnover grew also due to the increased price volatility as arbitrage opportunities became abundant and hedging demand also increased.
- Regulatory authorities in various Asian countries such as Malaysia, China, Philippines, and India adopted versatile exchange rate regimes, fuelling the growth in these markets.
US Dollar Continues to be Important
Although the foreign exchange market in various Asian countries has grown, the importance of the US dollar across various trades has not decreased. The USD continues to be the most widely traded exchange currency and contributes more than 80% in all the trades that occur in the Asian markets. The dollar was and still remains the vehicle currency, which primarily means it is the most accepted mode of exchange internationally and is used to settle transactions executed in other currencies.
Nonetheless, the overwhelming usage of the American dollar as the vehicle currency increases the vulnerability of the Asian currencies related to the settlement risk. One specific is the Herstatt risk that arises because of the settlement occurring during different time zones. This can be avoided by choosing the iFOREX India platform, which offers users the option of trading 24 hours per day for five days in a week. Another possible method available to lower settlement risk in the Asian forex markets is by increasing the usage of regional currencies in the intra-regional trades that occur.
The Asian forex market has seen significant development in the recent years. Turnover has increased with financial customers becoming important participants. Still, settlement risks exist but focus on using local currencies for settlement is slowly becoming the norm. Online trading platforms have further improved the potential opportunities that are available to investors.
