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Volatility shocks to the market in February helped drive FX Futures volumes at SGX


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8 March 2018


Volatility shocks to the market in February helped drive FX Futures volumes at SGX

The start of February saw the strong return of volatility to the global financial markets. The Dow Jones index recorded two of its worst days on record, losing over 1000 points twice in the same week amidst wild swings in the markets. Over first 6 trading days of February, the Dow lost 8.75% of its value.

Asian equities fared little better. On 6 February, the Nikkei oscillated within a 1,200 points range, one of the widest ranges seen since 2000, before dropping nearly 5% on the same day. US bond yields continued to rise as yields on 10-year US treasury bonds increased, closing in on 3%. This had a significant impact on the high yield bond market, typically pegged to the US treasury market, and investors now need to re-evaluate the risk / reward ratios.

After being benign for the past few years, the VIX index suddenly shot up on 6 February to over 50, causing investments with short volatility strategies to book losses. However, by the end of month, VIX headed back towards its lows, providing some comfort to the market while Dow recovered most of the significant losses seen in the month.


SGX FX Futures volume in February doubled y-o-y

§ Aggregate SGX FX futures volume remains above 1 million contracts; y-o-y growth at 99.3%

§ USD/CNH futures hit a record high Average Daily Volume (ADV) of 13,505 contracts in February, with 10 consecutive days of trading over US$ 1 billion despite the impact of the Chinese New Year holidays

§ Expansionary budget and inflationary outlook for the rupee triggered volatility; SGX INR/USD futures grew 87% y-o-y, with ADV above US$ 1.58 billion

For SGX FX futures, February saw mixed activity. Activity was muted in the middle of the month with aggregate volume slowing down as expected. However, the ADV remained strong. Despite several holidays in key markets during the month, the aggregate volume for SGX FX futures stayed above 1 million contracts [1,172,395] or approximately US$ 53 billion for the full month. This represents a strong 99.3% growth y-o-y [588,331 contracts in February 2017]. On a Year-to-Date (YTD) basis, this represents an increase of 123% over the corresponding period in 2017.



SGX USD/CNH futures volume grew 164% y-o-y; sustained ADV despite Chinese New Year holidays

The renminbi had appreciated 3% against the US dollar in January, making it the highest month-on-month change since the devaluation in August 2015. The renminbi appreciation has been a secular trend, appreciating over 8.6% since ending year 2016 at 6.9370 against the US dollar. It still has about 3% to go before it hits the 6.1136 mark observed in mid-2015, just prior to the start of the devaluation.

Historically regulators have tended to step in when the currency has shown strong appreciation against the US dollar, in line with expectations for stability for the renminbi. However, their response to the recent continued strengthening has been different. This appreciation reflects the strength of the underlying economy, which is experiencing a shift from a supply to a demand driven focus, wherein a stronger currency helps with portfolio inflows. Exports are also growing, despite the appreciation in the currency since the start of 2017.

The recent appreciation in the currency has not always been smooth. CNH volatility has been moving up and the implied volatility for options with 1-week maturity has jumped by 130 basis points since the start of the year. February saw some sharp moves in the volatility of offshore renminbi, in line with the turbulence seen in global markets that remain in choppy waters. With the Chinese New Year celebrations lasting a week, market participants anticipated a squeeze in liquidity. As a result, the volatility spiked prior to the extended break and the 1-week implied volatility sharply moved above 9%, a level not reached in recent months.



SGX USD/CNH futures saw a pick-up in activity, with 10 successive days of trading in excess of US$ 1 billion, including two consecutive days of trading above US$ 2 billion. The ADV for the SGX USD/CNH futures was in excess of US$ 1.6 billion prior to the holiday break. As expected, trading was slow during the long break and resumed normal behaviour upon resumption. In February, the aggregate volume for the SGX USD/CNH futures was 243,089 contracts or US$ 24.3 billion, representing a y-o-y increase of 164%. With a strong start in January, the year-to-date (YTD) volume for the contract has already reached 540,100 contracts, up 170% from the corresponding period in 2017.

Overall, trading in SGX USD/CNH futures crossed the US$ 1 billion mark on 15 days in the month. For the last 6 months, the ADV for the SGX USD/CNH futures contracts has continuously stayed above US$ 1 billion. SGX has been the leading price discovery center for USD/CNH futures since January 2017, serving the needs of growing global demand for hedging market risk associated with CNH.



Rupee turned volatile amidst an expansionary budget; SGX INR/USD futures in February grew 87% y-o-y

A confluence of a volatile global macro environment and an expansionary budget unveiled on 1 February brought the rupee into volatile territory, with trading off to a frenetic start in February. In the OTC market (spot), the rupee oscillated significantly, losing nearly 40 paisa in a single session, before recovering all of its losses and then losing it again. Spurred on by the initial reaction to the budget, the SGX INR/USD futures traded above US$ 2 billion on the first two days of the month, kicking off an 8 day run with trading above US$ 1 billion.

RBI's Monetary Policy Committee (MPC) convened in the second week of the month, raising the expected inflation (CPI) to over 5%. Coming on the heels of the budget that outlined an ambitious state-sponsored health care plan, (NHPS) covering over 500 million beneficiaries at a projected cost of nearly 120 billion rupees, the inflation outlook added fuel to debates surrounding fiscal burden on the government. While tailwinds from economic growth provide some relief for regulators, headwinds in form of inflationary pressures lie ahead. With this background, the MPC highlighted several factors contributing to the upside inflationary risk and chose not to hike interest rates. However, this only provided a temporary respite to the rupee bond market. The subsequent release of the minutes of the MPC meeting confirmed the fear of a hawkish stand from the policy makers and led to a rout of the local government bonds amidst the steepening yield curve in anticipation of a rate hike down the road.

Yield chasing EM investors have coveted Indian bonds for a few years given the growth cycle and stable economic fundamentals. However, a rising yield environment coupled with weaker rupee is bound to hurt the same investors. The Indian public sector banks, which tend to be big buyers of Indian government debt to shore up their reserve ratios, have been reducing their holdings, a Bloomberg analysis showed. A couple of Indian holidays in the third week allowed the markets to take a breather despite the biggest fraud case involving India's second largest public sector bank making the headlines in the week. This case added a further stress of over 110 billion rupees on the government finances above the already committed 2.1 trillion rupees to recapitalise the public sector banks in India.

The net foreign portfolio flow into India was negative for the month, as equity investors withdrew funds from the market in light of a depreciating rupee. The rupee weakened 2.2% against the US dollar in February and in the process wiped away the gains made since start of the year. The rupee traded in a wider band than in January and with RBI setting the benchmark at 65.0458 on 22 February, it breached 65 against the US dollar for the first time in 3 months (since 21 November last year). The rupee ultimately ended February at 65.1031 against the greenback, losing over 141 paisa in the month and at its weakest in over 3 months.



The resultant volatility helped sustain the trading for SGX INR/USD futures in the shortest month of the year despite the momentum-breaking holidays. While the total volume of 915,032 contracts (US$ 28.4 billion) expectedly declined m-o-m given fewer trading days, the trading represents a robust increase of 87% on y-o-y basis. The ADV remained above US$ 1.58 billion in February. Driven by increasing participation of market participants, the cumulative YTD volume for the SGX INR/USD futures [2,042,210 contracts] is already up 114% over the corresponding timeframe in 2017 [955,787 contracts], reaffirming the continued deepening of liquidity at SGX.




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