Rhody Trader

There’s been quite a bit of talk in the markets of late about a big drop off in trading volume in the forex market (Bloomberg, Kathy Lien). What’s interesting is that while global volume is down, trading volume in the retail forex arena seems to be on the rise.

Now, I’m not surprised that the broad measures of volume as reported by the central banks, etc. are showing a decrease. Currency market flows are predicated mainly on international trade and capital flows. With trade slowing, naturally the volumes are expected to come down as well. I had questions about whether the capital flow part was dropping too, though, so I looked to the only real volume proxy there is for the forex market – futures.

The chart below shows the weekly front month continuous Yen contract.

You’ll notice two things above. Firstly, volume in 2009 is definitely running well below where it was in 2008. Last year was probably close to 2007, though with much less variance from week to week. This year too is showing fairly consistent volume week to week, but the baseline level seems to be 30% or better below where it was last year.

The even more dramatic and telling thing is the clear downward slope in the Open Interest line. It’s been dropping for basically two years running now, giving us a pretty good indication of what’s been happening in the Yen carry trade. Right now we’re looking at OI running about a third of what it was this time in 2007. That’s a clear sign of less market participation.

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