A valuable insight into the NOK market

by May-Iren Wassås, Norges Bank Markets and ICT.

The Norges Bank publishes weekly statistics on the buying and selling of Norwegian Krone (NOK) against foreign currencies in the spot, futures and swap market. Statistics are based on transaction data submitted by the largest banks in the NOK market. Even though the underlying transactions only represent a part of the increase in global turnover in the NOK market, the statistics nonetheless provide valuable insight into the NOK transaction flows. Through this blog, we make comparisons with global revenue data and highlight analytical insights from statistics.

About Foreign Exchange Statistics

Since October 2005, Norges Bank has published statistics on the buying and selling of Norwegian kroner for foreign currencies based on data reported by a number of the largest Nordic market makers in the NOK market. Statistics provide information on NOK market activity and are a useful tool for monitoring flows in the forex market. Reporting banks submit detailed daily foreign exchange transactions to Statistics Norway, specifying the type of instrument, the maturity distribution, a breakdown by buying or selling NOK against EUR, USD or against other currencies, and by classification of counterparty category. Statistics are published weekly on the Norges Bank website and are presented in aggregate form. Figure 1 gives an overview of the categories of counterparties published.

NOK market turnover

In recent years, the reported turnover in combined NOK for the spot and futures market from Norges Bank’s foreign exchange statistics has averaged around NOK 50 million per day. However, quantifying NOK’s global turnover is difficult, in part due to a change in market structure and increasingly fragmented trade, with the emergence of an increasing number of news trading platforms, electronic platforms and algorithm providers. The BIS triennial survey of global foreign exchange and derivatives markets is probably the best insight available, and the 2019 survey shows the combined daily global turnover for cash and futures transactions in NOK was close to NOK 500 billion. According to the BIS, total worldwide turnover for all currencies, including NOK, has increased over a long period. Since the turnover reported in the foreign exchange transaction statistics has been relatively stable, this suggests that NOK turnover is increasingly occurring outside the Nordic reporting banks. Figure 2 shows that the share of foreign exchange statistics in NOK’s worldwide turnover has increased from 30% to 10%.

Tighter regulation in the aftermath of the 2008 financial crisis reduced banks’ risk capacity and their ability to hold risky stocks on their balance sheets. Previously, banks were more likely to put positions on their balance sheets, until they had a real underlying need to clear the position. Stricter regulation and a downscaling of proprietary trading desks have led banks to further mitigate their currency risk and move positions in the market more immediately. This will inflate the turnover statistics, as a foreign exchange transaction may change hands between market makers several times (“hot potato effect”) before being eventually offset by a commercial need to trade in the opposite direction. Even if the statistics do not include all global NOK trade, they will nevertheless serve as a reliable indicator of changes turnover in the NOK market.

NOK transaction flow

Statistics can also provide valuable information about the NOK transactions of different counterparties over time. Figure 3 shows the cumulative net purchases of NOK as a whole for spot and forward transactions by the different categories of counterparties.

In statistics, Norges Bank is included in a separate category. This is because the Norges Bank, on behalf of the Ministry of Finance, performs the necessary foreign exchange transactions associated with the expenditure of oil revenues through the central government budget. Until the end of 2013, Norges Bank sold NOK on behalf of the Ministry of Finance, but since the end of 2014 bought NOK on the market. The green line in the graph below illustrates this change as the cumulative net purchases of NOK by Norges Bank continue to decline until 2014 and increase thereafter.

Figure 3 also shows that non-financial clients in the counterparty category were buyers of NOK until 2015, but have since been sellers of NOK. This counterparty category includes oil companies, which are regular net buyers of NOK when converting foreign currency earnings to make oil tax payment. Conversely, Norwegian commercial importers are natural sellers of NOK given their need to buy intermediate goods etc. lower oil tax payments. At the same time, due to the non-oil sector current account deficit, non-financial market players are net sellers of NOK.

In addition to being a useful tool in explaining the activity and specific mechanisms of the NOK market, statistics can periodically support the development of the NOK exchange rate. The categories of counterparties, foreign banks and financial clients, can be used as an indication of the speculative behavior of players in the NOK market. This is based on the theory of order flow analysis, where the passing-on of the impact on the price of a trade may depend on the client initiating the trade and whether that client is assumed hold private information of signal value. Assuming that financial clients behave actively or more aggressively with respect to passive non-financial clients, the net NOK purchases of financial clients can sometimes align well with movements in the NOK exchange rate. The left side of Figure 4 shows the sum of cumulative NOK purchases by foreign banks and financial customers up to 2020 with the evolution of the Norwegian exchange rate. Here, a strong correlation is sometimes visible. In particular, the depreciation of the krone in the first quarter of 2020 coincided with substantial sales of NOK. These NOK sales largely reversed in the second half of the year as the krone appreciated. A review of weekly net purchases through 2020 for different categories of counterparties (Figure 4, right side) shows that financial clients in particular (including Norwegian non-bank financial counterparties) sold NOK in March. At the same time, their total turnover volume represented a significantly higher than normal share of the total turnover. This may largely reflect the continuing need of Norwegian asset managers to rebalance the currency hedges of their foreign investments as the value of their foreign assets declines.

Possible challenges associated with statistics

Due to their design, the statistics do not take into account transactions in NOK made outside the Nordic reporting banks. This shortcoming is important to remember when using statistics and interpreting the origins of NOK transactions.

Figure 5 illustrates the different ways in which a NOK purchase initiated by Norges Bank is included in the foreign exchange transaction statistics, depending on the intermediaries used. In the first example, Norges Bank buys NOK for EUR directly from one of the reporting banks, and the bank is supposed to quickly offload the position through a netting transaction with a counterparty wishing to sell NOK. It is assumed here that the end customer is a Norwegian import company. In this example, the transaction with Norges Bank is classified in the statistics as a purchase of NOK by Norges Bank, while the transaction between the reporting bank and the importing company is classified as sales of NOK from a non-financial customer. . In the second example in Figure 5, Norges Bank initiates the foreign exchange transaction with a market maker that is a non-reporting bank, such as a foreign bank. The foreign bank offloads its risk in the market by transferring it to another foreign bank, which in turn offloads its risk to one of the Nordic reporting banks. As in the first example, we assume that the reporting bank ultimately buys back the NOKs from an import company. For this example, the statistics will simultaneously show NOK purchases from a foreign bank and NOK sales from an import company. Since Norges Bank initiated the NOK exchange with a non-reporting bank in this example, it is not considered a counterparty in this case.

Since Norges Bank’s list of counterparties is not limited exclusively to reporting banks, its NOK transactions will be underestimated in the weekly foreign exchange transaction statistics. The difference between actual NOK transactions (published on the Norges Bank website on the last day of each month) and Norges Bank’s NOK purchases in the statistics corresponds to Norges Bank’s transactions with market makers other than market makers. defined reporting banks.

As a result, foreign banks’ NOK transactions could also include transactions initiated by Norwegian oil companies and other non-financial clients. Since speculative interest and sometimes influence on the exchange rate is attributed to the foreign bank category of the counterparty category, it is not unreasonable to assume that speculative NOK transactions are in part. overestimated in statistics. However, the extent of this is uncertain.

Despite some statistical issues, forex trading statistics still provide a unique overview of the NOK market. Statistics can be used both to examine the evolution of total turnover and to analyze the behavior and activity of different categories of counterparties.

Bankplassen er en fagblogg av ansatte i Norges Bank. Synspunktene som uttrykkes its representative forfatternes syn og kan ikke nødvendigvis tillegges Norges Bank. Har du spørsmål eller innspill, kontakt oss gjerne på [email protected]

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