14 June 2018
SGX FX Futures home in on US$ 75 billion volume with record 1.68 million contracts in May; YTD notional volume up 128% Y-o-Y
  • Aggregate SGX FX Futures volume crossed 1.68 million contracts in May
  • Cumulative FX Futures notional volume in May home in on US$ 75 billion; YTD volume at US$ 300 billion, up by 128% y-o-y
  • SGX USD/CNH futures crosses US$ 35 billion in May; YTD volume growth of 210% y-o-y
  • Rupee depreciated further in May to hit a 16-month low; SGX INR/USD futures volume at US$ 38.9 billion; YTD volume growth at 78% y-o-y

A month is a lifetime in global politics.


April ended with some promising steps towards denuclearization of the Korean peninsula. Evidence of further progress emerged early in May with reports of a proposed summit between the United States and North Korea. In the days prior to the proposed 12 June Singapore meeting, a joint US and South Korean military exercise coupled with hawkish comments from the US National Security Advisor threw a spanner in the works as the North Korean regime threatened to pull out of the meeting. The summit has since taken place in Singapore.


Elsewhere, the US announced on 8 May a unilateral withdrawal from the Iran nuclear deal against the advice of its allies and other signatories to the deal. SGX USD/CNH futures traded over US$ 1 billion in the overnight trading session as the news unfolded. Over the next few days, Iran and Israel traded missiles with each other, throwing the region into further uncertainty. Iran is a major oil producer responsible for almost 4% of global oil output. Any sanction on Iran can cause an upheaval in the energy markets. That could lead significant downstream economic impact on oil importing nations as crude prices could go higher and hurt their growth trajectory. European leaders have tried to salvage the deal; the continent will itself feel the impact of economic fallout from sanctions acutely as the US decision to re-impose sanctions on Iran has added economic stress to numerous international companies including those of European allies, which have significant business interests in Iran.


The potential of an all-out trade war between US and China also kept the markets volatile. Early in the month, the talks between the delegations of the two countries seemed to go well as both sides decided to put aside any immediate tariffs and continue to discuss ways to alleviate the situation. The markets responded favorably to the announcements. However, Asian markets opened in crisis mode on 30 May after news broke overnight that the US had again revived plans to impose tariffs on Chinese goods. In addition, the US announced on 31 May that it was imposing steep tariffs on steel and aluminum imports from allies and neighbours including the EU, Canada, and Mexico. This drew sharp criticism and threats of retaliatory measures from all of them, all of which are sure to keep markets volatile for a while.


With global turmoil providing the tailwind, FX futures on SGX had their best month with trading volumes at record levels. The SGX INR/USD futures volume crossed US$ 38 billion (up 63% m-o-m), the SGX USD/CNH futures crossed US$ 35 billion (up 26% m-o-m) and the aggregate FX futures volume crossed 1.6 million contracts for the first time, up 55% m-o-m and besting the 1.44 million contracts traded in January this year by almost 17%. SGX has already cleared volumes in excess of US$ 300 billion YTD with May alone accounting for almost US$ 75 billion. The cumulative notional volume YTD is up almost 128% y-o-y. 



SGX USD/CNH futures cross US$ 35 billion in May as renminbi depreciates 

After bracing for the inclusion of Chinese stocks in the MSCI indices for a long time, the wait finally ended for market participants in May. By some estimates, the inclusion might result in inflows of up to US$ 17 billion in Chinese stocks, routed via the passive funds. Market participants are enthusiastic that MSCI inclusion, coupled with other measures announced by the Chinese government, will make it easier for foreign institutions to participate in the Chinese onshore markets. May was nevertheless a month of mixed headlines for China.


The month began with US delegation in China to negotiate on trade. With a lot of public posturing on the issue, market participants kept a keen watch. With ZTE, the largest Chinese telecommunication conglomerate in focus, the renminbi oscillated and weakened nearly 400 pips from the previous month’s close before regaining it all and strengthening after US President Donald Trump announced a review and a reprieve for ZTE. The Chinese officials spent time in the US mid-month negotiating the trade issues and both sides agreed to put tariffs on hold while they discussed a detailed framework. China scrapped an anti-dumping and anti-subsidy probe into the US sorghum imports in what was perceived to be sign of a thawing of the relationship between the two sides.



The conciliatory approach mid-month calmed the markets. However, in a surprise move on 29 May, the US announced that the decision to introduce tariffs of up to 25% on Chinese goods worth about US$ 50 billion would stand, sending the financial markets into another tailspin. The SGX USD/CNH futures traded in excess of US$ 1 billion in the overnight session in response to the announcement and highlighted the growing importance of renminbi (and the hedging of associated market risk) to the global financial markets. The renminbi weakened in the trading session the next day with PBOC setting its USD/CNY mid-point rate at 6.4207 – the lowest in over 3 months.


Overall, SGX USD/CNH traded above US$ 1 billion on all 22 trading days in May; 1 May was a holiday. This 22-day run of US$ 1 billion-plus volume is the longest such streak since the 15 days seen in April. This also included 3 days of trading above US$ 2 billion and took the count of such days in 2018 to 12 against just 1 such day seen till the end of 2017.


Trading for the SGX USD/CNH futures contract continued to grow this year with the average daily volume (ADV) for May standing at US$ 1.7 billion, significantly up from US$ 1.1 billion at the end of last year. SGX has already cleared US$ 151 billion for the contract since the start of 2018, including a record US$ 35.6 billion in May – the first time that the volume has crossed US$ 35 billion in a month. This represents an increase of 213% over the cumulative volume in the first 5 months of 2017. The YTD volume for the pair [1,512,023 contracts] has already reached 80% of the full year volume in 2017, underscoring a noteworthy increase in our role for market risk management.



SGX INR/USD futures volume crossed US$ 37 billion in May as rupee slid past 68 level before recovering 

The Indian economy has done quite well in the last few years. A stable government has undertaken reformist initiatives to improve business environment; Indian entrepreneurs are able to exit their ventures at record valuations as the Walmart’s US$ 77 billion acquisition of Flipkart in May showed. Equity indices continued to remain close to all-time highs. However, headwinds in the form of rising oil prices and inflationary pressures are building up; emerging black spots are therefore hard to miss. Recent banking scandals have exposed previously hidden governance issues while the bond markets continued to flounder. The Indian rupee that had been relatively stable for the last few years is beginning to slide down a slippery path and this continued in May. India felt the pinch of Iranian sanctions as the rupee weakened yet again in May and hit a 16-month low before staging a partial recovery.


Rumored dollar buying by engineering companies and state-run banks pushed rupee above 67 against the dollar even as bonds got some support once RBI announced US$ 1.5 billion of debt purchases in the open market operations. By the middle of month though, the fortunes of rupee worsened further as it slid past 68 for the first time since January 2017 in the OTC spot market. Several news agencies reported that RBI intervened in the markets to stem the slide on 16 May. Bond buying programs in the open market also pointed towards the struggle to balance the currency and interest rates.


Politics remained part of the discourse in first half of the month with the southern state of Karnataka going into elections. This election provided an insight into the battle that lies ahead when the country goes to poll early next year with any electoral losses for BJP (PM Modi’s party) likely to impact investor confidence. In a tightly-contested election, BJP emerged with maximum seats and the Governor duly invited them to form the government. The opposition parties litigated the move and the Indian Supreme Court allowed BJP to form the government after a midnight hearing. However, BJP failed to prove majority on the floor and a coalition of opposition parties formed the government in state. The uncertainty in the outcome of the election led to a trading frenzy for the SGX INR/USD futures which recorded its highest trading volume of US$ 2.8 billion in the overnight session on 16 May. On 17 May, SGX INR/USD futures volume at SGX crossed US$ 3 billion for only the second time, and with overall SGX FX Futures volume hitting a new high of US$ 5.4 billion [141,085 contracts], the volatility continued to put the spotlight on the need for risk management on venues such as SGX.



Most emerging countries in Asia have felt the heat from rising US interest rates in recent months because of their dependence on foreign portfolio flows and bouts of depreciation of the local currency, thereby reducing the dollar-equivalent returns for foreign investors. India is no exception as rising yields, higher oil prices and continued withdrawal of funds by foreign portfolio managers continue to weigh on the Indian fixed income markets. While the net portfolio flow to Indian equities in 2018 also turned negative in May, the pullout has been particularly sharp for fixed income markets with more than US$ 5.7 billion withdrawn in the last 3 months. Local participation in the government bond auctions seemed to have slowed as well, with the underwriters having to step in and rescue the last few auctions. Rupee has already weakened around 5.5 percent in the year and could suffer even further as the rise in oil prices and Iran sanctions are likely to cause uncertainty in the near term. Moody’s cut India’s GDP growth forecast to 7.3% in 2018, from a previous forecast of 7.5% due to higher oil prices and tighter financial conditions.


The volatility brought upon by the weakening of rupee has contributed to strong trading in the SGX INR/USD futures. The ADV for the SGX INR/USD contract jumped to US$ 1.77 billion at the end of May after slowing down in March and April. The aggregate trading volume for the SGX INR/USD futures also hit a new peak in May. The total volume of 1,316,576 contracts or US$ 38.9 billion was better than the previous high of 1,127,178 contracts traded in January this year. The trading in SGX INR/USD contract crossed the US$ 1 billion threshold 19 times in May, including 8 days when volume exceeded US$ 2 billion. Volume in excess of US$ 2 billion for the INR/USD futures occurred on 19 days in 2018 against a total of 7 days in 2017, signifying the growth in the participation for the contract as well as the role SGX plays in helping market participants manage market risk.



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