The recent study from FXLIQUIDITY, founded by Mosaic, CLS and MUFG in a collaborative project, concludes that liquidity in the foreign exchange markets is returning to pre-COVID-19 levels for both the G10 and emerging markets currencies. During the latter three weeks of June, EM volumes returned to near pre-COVID-19 levels for the first time. In its previous count, EM currencies had been at +11% of pre-crisis levels while trading volumes in emerging market pairs were at about 45%, and outside of market hours trading generally remains very thin.
G10 currency volumes, while remain 17% above pre-COVID-19 levels, dropped 23 percent compared to Mosaic’s previous report. Major currency pairs, including EURUSD, USDJPY and AUDUSD suffered the most, with drops in its daily turnover ranging between $2-3 billion per day.
In liquidity terms, the FX market activity is coming back toward pre-COVID-19 levels for some of the major currencies, but overall remains below pre-crisis figures, with G10 and EM currencies recording on average about 72% to 64%, respectively, of their previous daily volumes.
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Using a multi-factor model, the data indicates that spreads have narrowed from the peaks though it remain elevated for certain currencies..
The report draws on the CLS’ turnover data, which saw its monthly volume jumping to over 1.48 trillion in May 2020, to assess the liquidity profile and broad trends for major FX pairs. The study also compares liquidity conditions during several episodes of market stress, also highlighting the magnitude and duration of changes in liquidity following the recent corona-led volatility.
Matthew Hodgson, CEO and Founder of Mosaic Smart Data, said: “Emerging market currency pair volumes are decreasing and have nearly reached their pre-COVID-19 levels, perhaps indicating a stabilisation of market sentiment. Volumes are dropping across the board for G10 currencies and this could be a sign of things to come for liquidity as volumes decline in the northern hemisphere during summer holiday period. The biggest mover in liquidity score was USD/JPY moving to 80% of pre-COVID-19 liquidity and up from 70% in the prior period. The drop in volumes seen of between USD 2-3 billion per day corrected some directional bias, creating a more stable environment for improved liquidity scores.”
Mosaic Smart Data, which is backed by major institutions such as JP Morgan and Commerzbank, is one of several firms attempting to make sense, and profit, out of the masses of pricing and transaction data now available to financial institutions. Founded in 2014 by ex-Deutsche Bank and Citigroup trader Matthew Hodgson, the company offers banks prediction analysis and AI technology for large volumes of data within sales, trading, and compliance teams.