11-a LECIONO La seĝo staras malproksime
MAJO MAYO VINTRO INVIERNO LA INSTRUISTO PAROLAS
Figure 4.108 shows the average daily OTC FX transaction volumes for advanced economies and emerging market currencies. EM currency transaction volumes have grown since 2007, reflecting the increase in investment inflows into EMs. Volumes have increased from $625 billion to just over $1 trillion. The largest traded EM
currencies are the Russian Rouble, Chinese Yuan, Hong Kong Dollar and the Mexican Peso, which account for 40% of EM FX volumes.
Figure 4.108: Daily average OTC FX trading volumes by currency210
Source: BIS
Figure 4.109 compares the bid-ask spreads for a basket of advanced economy currencies against emerging markets currencies. Although EM
210 Advanced economy currencies include the US Dollar, Canadian
Dollar, Japanese Yen, Euro, British Pound, Australian Dollar, Swiss Franc, New Zealand Dollar, Swedish Krona, Norwegian Krone, Singaporean Dollar, and Danish Krone. Emerging market currencies include all other currencies monitored by the BIS
currencies traded at spreads 14 bps larger than hard currencies, EM spreads have declined significantly, and at several points between 2010 and 2013, traded at lower spreads.
Figure 4.109: Relative bid-ask spreads for advanced economy vs emerging market currencies
Source: Thomson Reuters
Figure 4.110 shows the exchange rate volatility for a basket of EM currencies. Volatility increased during the crisis, but subsequently declined before suffering brief spikes in 2011 and 2013. This suggests that liquidity has broadly held up in these markets, however there are some signs that volatility has started to tick up again towards the end of 2014. This is especially the case for the rouble, which has seen a spike in volatility as Western sanctions bite.
Figure 4.110: Exchange rate volatility for a basket of EM currencies and rouble, 30-day standard deviation in price211
Source: Thomson Reuters
Triennial Bank Survey: Global foreign exchange market turnover in 2013. For the purpose of aggregate volumes, BIS divides the total volumes across different currencies by two.
211 EM currencies in the chart excludes the Russian rouble.
0 100 200 300 400 500 600 700 800 900 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 Index, Feb 2004 = 100
BIST NATIONAL 100 S&P BSE (SENSEX) 30
MEXBOL BOVESPA 0 2 4 6 8 10 12 1995 1998 2001 2004 2007 2010 2013
Advanced economy currencies Emerging market currencies
US$ trillion 0.00% 0.05% 0.10% 0.15% 0.20% 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 Advanced economy currencies
Emerging market currencies
0.0 0.5 1.0 1.5 2.0 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 RUB EM currencies
Box 4.6: Possible impacts on emerging markets from changes in market liquidity Emerging markets have seen strong growth in
issuance, particularly in fixed income instruments, as a result of faster economic growth, albeit from a lower base. The overall trading volumes of emerging market debt rose to US$1.45 trillion in Q3 2014, up from US$1.26 trillion the year before, with corporate Eurobond trading exceeding sovereign Eurobonds for a second straight quarter.212
Emerging markets are highly dependent on global liquidity conditions which support the Eurobond market. Liquidity provides emerging market economies with resources for strengthening of their underlying macroeconomic fundamentals.
A liquidity stress event that originates from advanced economies is likely to affect emerging markets as they have been recipients of large amounts of capital inflows during the period of quantitative easing. Around a third of fixed income issues in emerging markets consists of Brady bonds, Eurobonds or hard currency denominated bonds.213
The concerns around the impact of a capital inflows in emerging markets are two-fold. First, the increase in net portfolio flows into emerging markets, partly as a result of lower growth prospects and
unconventional monetary policy in advanced economies, has raised some concerns about the possible adverse effects on domestic economies, including the exchange rate appreciation and inflationary pressures. Second, a global reduction in liquidity and a rapid reversal of capital flows will impair the ability of emerging economies to access much-needed capital for investment, which will have
an impact on growth, output, productivity and capital formation.
An example of this dynamic is the Mexican crisis of 1994-1995 (“The Tequila Crisis”): Excessive
enthusiasm on the part of foreign investors not based on Mexico’s economic fundamentals, combined with a currency mismatch in banks’ assets and liabilities, left Mexico vulnerable to a sudden change in investor appetite for Mexican investments. An increase in US interest rates triggered a sudden change in investor sentiment, leading to a balance of payments and banking crisis in Mexico.
A global contraction in liquidity will reduce demand for emerging market debt. In fact there are some signs that regulatory changes in the US and Europe have had an impact on the liquidity of emerging market instruments, as indicated by fast declining turnover ratios. The reversal of QE in the short-term is likely to exacerbate this trend. According to Moody’s “the tapering process and its associated increase in US and global financing costs will, on average, have a considerably greater impact on countries in emerging markets than on advanced countries… emerging market economies could face a cumulative 2013-2016 GDP growth loss of between 2.8% and 3.1%.”214
In the longer term, emerging markets will develop their own domestic financial markets, but are dependent on international financial markets to make this transition.
212 Source: EMTA.
213 Based on data for Brazil, Mexico, Turkey and India.
214 Moody’s Investor services, “QE Tapering: Impact Differs
Summary
Following our review of liquidity across asset classes, we find specific areas where we have detected a reduction in market liquidity, or warning signs that more significant declines may be masked by other factors. This is most pronounced in dealer-driven markets for OTC-traded financial instruments. This has been accompanied by changes to market behaviour to accommodate the new liquidity environment, which help to mitigate its impact. We have identified four broad areas of weakness in financial markets liquidity. These are:
1. Difficulty of executing trades; 2. Reduction in market depth; 3. Increase in volatility; and
4. Bifurcation in liquidity, i.e. a reduction in liquidity in assets which have traditionally been less liquid.
We discuss each in turn.