The TRADE predictions series 2023: Foreign exchange, part two

Participants from Manulife, CME Group, OSTTRA and Siege FX unpack what they expect 2023 will hold for the foreign exchange markets.

By Editors

Peter Welsby, senior multi-asset trader, Manulife: We find ourselves in a market environment that we haven’t seen for a while, with increasing geopolitical instability, abundant inflation, diverging policies and greater market volatility. Given these changes, should execution methods remain the same? Should we be continuing down the path of evermore automation and increased algo usage? or is it time to re-examine the benefits that risk transfer can offer?

There is no unique answer and everyone will customise to meet their execution goals, but I expect assumptions to be challenged more than ever in 2023. Additionally, forwards and swaps pricing will remain forefront in market participant discussions next year. The additional challenges that SA-CCR has caused for banks is focusing minds on what can be done to alleviate this. Will we see the start of a shift toward cleared OTC FX? Will we see an increase in the trading of FX Futures to express views? If either of these are to occur, it needs to be at the right price and easily fit into current buy-side workflows.

Paul Houston, global head of FX products, CME Group: As volatility has returned to FX this year, liquidity has become more of a premium to market participants. More and more OTC market participants will be turning to futures and options listed on all-to-all streaming electronic order book for both price discovery and differentiated liquidity in 2023. The final phase of UMR in September was a key milestone for FX market structure, but it will take time for market participants to adapt. We have already seen that there are potentially significant margin savings to be made from trading centrally cleared listed FX options versus traditional uncleared OTC FX options for those impacted. The reopening of the annual AANA calculation window in March 2023 may act as a further catalyst for investment managers to alter their approach. FX futures are not included in the ANNA calculation, making them a helpful complement to FX forwards without impacting the threshold.

Joanna Davies, head of FX and securities, OSTTRA: Global volumes hitting record highs reinforces why the industry needs to work together to solve the exchange traded derivatives (ETD) workflow conundrum once and for all in 2023. When volumes rise, the operational risk and capacity burden on market participants intensifies. Even if an asset manager is highly efficient in the allocation process during times of peak volumes, there could still be multiple allocations being communicated within minutes of the market closing. This creates a myriad of problems, which the industry continues to wrestle with. Overcoming this longstanding issue requires continued industry wide collaboration on designing the workflows with asset managers, executing brokers, and clearing brokers. As we have always advocated, the industry needs to work together to solve the longstanding issues around the allocation workflow. It is, frankly, in no market participants interest for there to be a bifurcation of the ETD post-trade workflow – as this only compounds the problem. If one believes in evolution, then the ETD community can leverage a solution today – to finally overcome this issue next year.

Claude Goulet, CEO of Siege FX: Against a backdrop of rising inflation and interest rates, the ongoing economic squeeze will set the tone for FX trading priorities in 2023. The underlying trend for traders to re-double efforts towards operational efficiencies and cost savings along the entire trade lifecycle will persist, but we expect capital utilisation considerations to become significantly more prominent as part of this exercise. We also expect this latter point to trigger a more balanced approach when further reviewing FX processes to ensure improved outcomes across both the buy-side and banks.

The focus on demonstrating best execution, which entails the need for better data, as well as traders looking to minimise their market impact will also be recurrent themes.  As a result, automated solutions such as FX algos will continue to experience growth, alongside the development of a broader range of available strategies for market participants. Finally, we think 2023 could mark an important point for digital assets. As the underlying infrastructure continues to develop towards that of fiat FX markets, we expect to see the first signs of real institutional adoption. That said, we do not expect the beneficiaries to be crypto currencies, but rather CBDC and other tokenised version of more traditional assets.