Foreign Exchange Products and Indices Gain Popularity Amid Investor Interest in Currencies

Investors' fascination with currencies has given rise to a renewed interest in foreign exchange instruments, driving investment banks to introduce new products and indices that enable investors to express views on currency movements independently. The launch of the Deutsche Bank Asia 5 Index in April last year and the Bloomberg JP Morgan Asian Currency Index in October have attracted significant trading volumes, with billions of dollars worth of products and derivatives based on the indices seeing increased demand from hedge funds, asset managers, and private wealth clients.

Key Takeaways:

• The Deutsche Bank Asia 5 Index, launched in April last year, tracks the movement in five currencies against the US dollar and has seen strong demand from hedge funds, asset managers, and private wealth clients.
• The Bloomberg JP Morgan Asian Currency Index, launched in October, is a trade-weighted index comprising 10 Asian currencies, including the yuan, Hong Kong dollar, and Indonesian rupiah, and has attracted significant trading volumes.
• The products have attracted a diverse range of investors, including large risk takers, investors who want to take a view on the dollar weakening against Asia, and asset managers who want to strip out the FX component.
• The growing interest in forex products is also attributed to investors' greater exposure to Asia and the weakness of the dollar.
• The rebound in the dollar and the easing of speculation about a yuan revaluation have not dampened investor appetites, with Deutsche Bank reporting more trading in its Asia 5 Index products in January than in the same period last year since its launch.

Statistics:

• Trillions of dollars worth of trading in products and derivatives based on the Deutsche Bank Asia 5 Index and the Bloomberg JP Morgan Asian Currency Index.
• 25% of the Bloomberg JP Morgan Asian Currency Index is determined by each currency's liquidity.
• The Deutsche Bank Asia 5 Index contains five equally weighted currencies — the Singapore dollar, Korean won, New Taiwan dollar, Indian rupee, and Thai baht — chosen to capture the cyclical movement in the Asian trade-weighted index.

Sources:

• Deutsche Bank Asia 5 Index
• Bloomberg JP Morgan Asian Currency Index
• "For the funds, the index is an easy way of trading Asian risk, because they don't have to manage multiple currencies with multiple settlements and different regulations regarding what you can and cannot do in each of those currencies," said Clifford Cheah, Deutsche Bank's head of foreign exchange and short-term trading.
• "And that's the type of audience we are starting to see a lot more of — the large risk takers and investors who don't want to sit there and trade each individual currency but just want to take one big position and leave it," said Erik Herzfeld, head of foreign exchange options at JP Morgan.
• "Demand has obviously been influenced by the weakness in the dollar and people trying to guess when China will move, but the story is broader than that," said Jai Rajpal, the head of non-deliverable forward trading at Deutsche Bank.