Speculators Hit Forex Market

Russian investors are rapidly expanding their presence in the global foreign exchange market and adding a significant amount of "hot" speculative money that is adding to sharp moves in an already volatile market.

Last week saw the biggest weekly gain for sterling against the yen since mid-2000, appreciating some 4 percent.

Traders said there was little fundamental news behind the move, and it was largely driven by Russian investors who were looking to build short-term "carry" positions where they sell low yielding currencies to fund purchases of higher yielding assets.

"Last week Russian names got in among it in a big way," said a trader at a major U.S. bank in London. "They were big buyers of the carry trade and there were six or seven Russian banks ramming around the market."

Russia is a huge recipient of foreign exchange receipts and soaring gas and oil prices have meant these are growing all the time.

The country's gold and forex reserves, the world's third-largest, hit a record $519 billion last week.

Russian banks and citizens, flush with cash from oil and gas sales, are looking to profit on the $3.2 trillion a day foreign exchange market by taking speculative, short-term bets, pushing up volatility.

"The big volumes of FX deals in Russia is generated by two kinds of Russian banks: first, banks which are related to major oil, gas and metal exporters. Exporters' average daily income is equivalent to several billion U.S. dollars," said Igor Suzdaltsev, head of financial institutions at OTP Bank in Moscow.

"The second type of Russian FX banks are speculators and volumes of each such bank well exceeds a billion a day."

He said the sharp growth was set to continue.

"Since Russian foreign trade volumes are growing fast and trading technologies are developing quickly we can predict that FX operations in Russia will grow at the same pace in years to come."

Metallinvest bank has seen a sharp increase in these trades over the last year.

"Big flows started about two years ago and now on a big day we would see as much as $500 million worth of speculative trade in sterling/yen trade but it does vary a lot from week-to-week," said the head of its foreign exchange and money markets desk, Sergei Romanchuk.

This is in addition to the $1 billion per day that the bank trades meeting the regular transactional needs of customers, Romanchuk said.

The Central Bank reports that average daily volume in spot foreign exchange in March increased 54 percent to $103 billion while FX derivatives business doubled to $4 billion.

Much of this increase is down to greater interest in trading from wealthy individuals who are reaping the benefits of Russia's booming energy market.

"There's more and more willingness to trade and the number of individuals trading has gone up quickly as money trickles down to individuals from the export of raw materials," said Dmitry Piskulov, chairman of the committee for professionalism at the National Foreign Exchange Association for Russia.

However, the growth of Russian FX trade has been limited by problems in the banking system which mean that trade execution within Russia is sometimes a precarious business.

Rather than the 24-hour settlement available in the major banking sectors, Russian customers must execute trades in one of five windows in Russian trading time.

This system limits the amount of trade that can be done and its lack of reliability is putting off international banks who would otherwise be keen to do business in the region.

"We know of Western banks who have lost hundreds of thousands of dollars because settlement times have been missed and money that's waiting to go into account gets stuck overnight not getting any interest," said a sales head at a major trading platform.