CURRENCY volatility has given a big boost to Singapore's foreign exchange (FX) market growth. Average daily trading volume jumped 35 per cent from three years ago to US$517 billion in April 2016.
Singapore remains the biggest FX centre in Asia and third-largest globally after London and New York, according to the 2016 Triennial Central Bank Survey by the Bank for International Settlements released on Thursday.
From an already impressive US$383 billion in April 2013, Singapore's share of global FX volume swelled to 7.9 per cent in 2016, from 5.7 per cent three years ago.
The market share gain comes as trading in FX markets has fallen; worldwide, it averaged US$5.1 trillion per day in April 2016, down from US$5.4 trillion in April 2013.
Singapore overtook Tokyo to become the world's third-largest FX centre in 2013. In 2010, Singapore had ranked fourth, with average daily turnover of US$266 billion that year, behind London, New York and Tokyo.
The survey also showed the rise of the yuan and decline of the euro which has continued since the beginning of the euro area sovereign debt crisis in 2010. Both these trends were also reflected in FX activity here.
The US dollar remained the dominant vehicle currency, being on one side of 88 per cent of all trades in April 2016. The yuan doubled its share to 4 per cent to become the world's eighth most actively traded currency and the most actively traded emerging market currency, overtaking the Mexican peso.
The expansion in Singapore's FX market was chiefly driven by growth in G-10 and Asian currencies, said the Monetary Authority of Singapore. The currencies which increased the most included the yuan (78 per cent), yen (67 per cent), sterling (60 per cent) and South Korean won (55 per cent).
The euro was the only currency - out of the top 10 traded in Singapore - where trading volume fell, down 4 per cent from three years ago.
G-10 currencies are the most heavily traded currencies in the world. They are the US dollar, euro, yen, sterling, Swiss franc, Australian dollar, New Zealand dollar, Canadian dollar, Swedish krona and Norwegian krone.
Foreign exchange swaps made up the largest traded foreign exchange product class in Singapore and accounted for 48 per cent of all trades, followed by spot (24 per cent) and FX forwards (20 per cent), said MAS.
The interest rate derivatives market also registered strong growth, with average daily volumes surging 57 per cent to US$58 billion in April 2016, compared to US$37 billion in April 2013, the second highest in Asia.
Said Jacqueline Loh, MAS deputy managing director: "Singapore is building on its role as the pre-eminent marketplace in Asia for global and regional banks, non-bank financial institutions and corporate treasurers to manage their FX risks.
"MAS is working with the industry to build further on this lead. We are looking to further enhance price discovery, liquidity and transparency in our FX market by strengthening electronic trading capabilities and anchoring market infrastructure."
Traders said that FX volatility was behind the jump in trading volumes; also fuelling activity here was the fact that Singapore is a regional hub for global and regional banks as well as MNCs.
"Singapore is a regional hub for global and regional banks, non-bank financial institutions and over the years also a hub for corporate treasury centres," said Andrew Ng, DBS Bank group executive and head of treasury and markets.
The jump in FX volatility in 2015 and 2016 is behind the strong growth as hedging activities increased, said Mr Ng. He added that the jump in FX swaps was also significant as institutions used the swap market to fund their balance sheet.
"The negative interest rates in some currencies also drove the growth in volume of FX swap and cross currency swaps."
The central banks of Denmark, Sweden, Switzerland and Japan have imposed negative interest rates in their bid to boost their economies.
Technological advances have led to a significant shift towards round-the-clock electronic trading, driving the surge in FX trading volumes, said Sudhanshu Sanadhya, JPMorgan Chase and Co head of trading, currencies and emerging markets. "Electronic trading platforms have also enabled market participants to consolidate their trading activities in major financial centres across different time zones. Singapore - with its exceptional infrastructure, human capital and business environment - is a natural FX hub in the Asia-Pacific region."
Yuan trading will expand further as the currency gains acceptance as a payment currency. The Chinese unit, also known as the renminbi (RMB), officially becomes an international foreign reserve currency on Oct 1.
"Rising trade and investments in Asia on the back of the strong demographics and consumer affluence, as well as the increased trading of Asian currencies such as the RMB, will continue to reinforce Singapore's status as a world-class financial, trading and wealth management hub," said Francis Tan, United Overseas Bank economist.
The yuan was the fifth most active currency for global payments in July, according to global transaction service provider Swift last month. Its market share increased to 1.9 per cent in July from 1.72 per cent in June. The RMB came after the US dollar, euro, sterling and the yen, said Swift.