Significantly higher turnover in kroner and larger Danish foreign exchange market

The foreign exchange market is the biggest of all financial markets in the world in terms of turnover. Globally, the foreign exchange market generates a daily turnover of around kr. 52,000 billion. This corresponds to 30 times world’s daily production (GDP).¹ An efficient foreign exchange market supports the cross-border trade in goods, services and financial assets and is thus crucial to the economy, especially for small open economies like the Danish economy.

When a company or private individuals trade currency, this is done through a bank. The banks also trade currency among themselves. To acquire knowledge about the foreign exchange market, Danmarks Nationalbank collects turnover data for foreign exchange turnover from banks located in Denmark. Every three years, Danmarks Nationalbank provides data on foreign exchange transactions in Denmark to international statistics on turnover in the global foreign exchange market, which is coordinated by the Bank for International Settlements (BIS), see Appendix 1.

In a Danish context, the market for purchases and sales of kroner against foreign currencies, the foreign exchange market for kroner, is key, especially when it comes to the Danish fixed exchange rate policy vis-à-vis the euro². This is the market on which the krone exchange rate is formed. Therefore, the focus is here on the foreign exchange market for Danish kroner. Firstly, we look at the global foreign exchange market for kroner, which can be divided into the Danish foreign exchange market for kroner and the offshore market for Danish kroner, see chart 1. The Danish foreign exchange market for kroner is part of the global foreign exchange market for kroner in which banks located in Denmark participate, whereas the offshore market for kroner is the market for kroner outside Denmark without participation of banks located in Denmark. In addition to transactions involving kroner, there is considerable trade in other currencies than the krone in Denmark. For example, trading in euro and dollar against other currencies than kroner plays a major role in Denmark. So finally we look at the Danish foreign exchange market as a whole.

The global foreign exchange market for Danish kroner comprises total purchases and sales of foreign exchange against Danish kroner in both Denmark and abroad. The foreign exchange market for kroner is thus not geographically or physically limited to Denmark.

Large increase in global turnover of kroner

The total daily global turnover in Danish kroner is kr. 378 billion, see chart 2. This is a record turnover in Danish kroner. Relative to 2019, the daily turnover has increased by kr. 101 billion per day, equal to an increase of more than a one-third.

The turnover in Danish kroner follows the trend from the total global foreign exchange turnover, which has increased by 14 per cent relative to 2019. According to BIS³, part of the explanation for the increasing turnover can be attributed to increased volatility, reflecting greater uncertainty. The war in Ukraine and rising interest rates and commodity prices have led to greater uncertainty and thus increased volatility in the financial markets in general, including the foreign exchange market. The greater uncertainty and volatility has increased the need for hedging currency exposure and rebalancing portfolios as well as the incentive to take up speculative foreign exchange positions. Danish market participants mention that part of the increased turnover in kroner can be attributed to foreign players’ rebalancing of portfolios with Danish bonds in connection with rising interest rates and falling prices.

Large foreign banks are driving growth

The increase in global turnover of kroner is primarily driven by trading between large banks outside Denmark. Both Danish market participants and BIS point out that especially the large banks, which are also the largest currency traders, may have had an increased need for hedging imbalances in foreign exchange positions from trades with customers in the interbank market.

The turnover from trades in kroner is included in 0.7 per cent of the global foreign exchange turnover, and kroner is the 20th most traded currency in the world.

The Danish foreign exchange market for kroner is geographically limited to at least one of the parties to the trade being a bank with a trading desk in Denmark.

Denmark pursues a fixed exchange rate policy towards the euro area, and Danmarks Nationalbank uses the Danish foreign exchange market for kroner to make intervention purchases and sales of currencies in order to stabilise the exchange rate of the krone against the euro. The Danish foreign exchange market for kroner is thus a stable reference for the market in outside Denmark. A well-functioning foreign exchange market is important for the implementation of the fixed exchange rate policy and benefits all market participants. Danmarks Nationalbank therefore supports and promotes good market practice on the foreign exchange market and compliance with Foreign Exchange Global Code.⁴

Increased turnover in the Danish foreign exchange market for kroner

The daily turnover in the Danish foreign exchange market for kroner has increased to kr. 94 billion per day, see chart 3. The increase follows the general development in the Danish foreign exchange market, see below. As on the global stage, according to the market participants, part of the increased trading in the Danish foreign exchange market for kroner can be attributed to increased volatility in the foreign exchange market.

The vast majority of the trades in kroner are against the euro or dollar. The dollar is included in 53 per cent of the trades in the foreign exchange market for kroner. This is followed by the euro at 37 per cent. The figures reflect both that the dollar is the most traded currency in the world and the great economic interaction with the euro area.

The increase in turnover is driven by FX swaps

FX swaps make up a large part of the Danish foreign exchange market for kroner and of the global foreign exchange market, where they account for approximately half the total turnover. A FX swap is a foreign exchange transaction consisting of a spot transaction combined with an opposite forward transaction.⁵

More than 75 per cent of the global turnover in kroner is generated abroad without participation of banks located in Denmark, i.e. offshore. The volume of offshore trading in kroner has increased significantly.

Part of the offshore turnover is based on trading in Danish kroner, for example in the USA and Singapore, at times outside the opening hours in the Danish foreign exchange market for kroner. However, most of the turnover is generated during European opening hours, and there is no sharp dividing line between the Danish foreign exchange market for kroner and the offshore market for Danish kroner. Part of the offshore turnover is generated between Danish banks’ foreign entities and Danish companies’ foreign entities. However, it is, for example, also common for large Danish companies and institutional investors to trade foreign currency against kroner with large international banks with which they are already engaged in other financial transactions.

The growing importance of offshore currency trading, i.e. trading in currencies outside the local market, is a global trend. Global currency trading has become more concentrated in a handful of financial centres. Just under 80 per cent of the global currency turnover is generated in the UK, USA, Singapore, Hong Kong and Japan. The UK alone accounts for 38 per cent of the global currency turnover. The concentration of global currency trading can be attributed to a number of factors, including economies of scale from gathering several different banking functions in the same place.⁶

Danish market participants confirm that both foreign and Danish players to a large extent use London, e.g. to adjust exposure in Danish kroner. For kroner, banks in precisely the UK are counterparties to more than a third of the global turnover, and the turnover in kroner in the USA is on the same level as in Denmark, see chart 4.

The Danish foreign exchange market is the market for foreign exchange trades in Denmark. This market is geographically limited to one of the parties to the trade being a bank with a trading desk in Denmark. In addition to the Danish foreign exchange market for kroner, the Danish foreign exchange market also includes all foreign exchange transactions that do not include kroner, for example trades between euro and dollar.

Danish foreign exchange market is the largest in the Nordic region

The total daily turnover in all currencies on the Danish foreign exchange market is kr. 571 billion, see chart 5. Relative to 2019, the daily turnover has increased by kr. 103 billion, equal to an increase of more than one-fifth. Just as for the foreign exchange market for kroner, the development in the Danish foreign exchange market follows the global trend towards increased activity. The market participants state that the increased activity can be partly attributed to increased volatility due to the war in Ukraine and rising interest rates and commodity prices. 

The Danish foreign exchange market as a whole ranks as the 13th largest in the world with a share of nearly 1 per cent of the total global turnover. The Danish foreign exchange market is larger than, for example, the Swedish and Norwegian markets, which rank as the 18th and 22nd largest foreign exchange markets, respectively, in the world. This reflects that significant players in the foreign exchange market in the Nordic region have chosen to gather their interbank currency trading in Copenhagen. 

Large banks account for higher share

The increase in turnover in the Danish foreign exchange market is driven by the large banks which participate in the survey, see chart 6. Two-thirds of the total foreign exchange turnover in Denmark are generated between large banks.

The growing turnover between large banks is also a global trend. Of the total global currency turnover, just under half is generated between large banks, which is an increasing share relative to previous years. According to the Danish market participants and the BIS, one of the explanations for the growing currency trading between the large banks is the increased volatility in the foreign exchange market. The increased volatility may mean that the banks have a greater need for hedging currency imbalances in foreign exchange positions from trades with customers in the interbank market.⁷

More electronic foreign exchange trading

According to the market participants, the increase in turnover can also be attributed to the greater spread of electronic trading, because it makes it easier for the banks to hedge currency positions through trading in the market.⁸ Since 2019, there has been a clear shift towards electronic trading, which now accounts for 66 per cent of foreign exchange trading in Denmark⁹. The Danish market participants mention that the greater spread of electronic trading amont other reflects the banks' desire to limit operational risks and an increased focus from customers on costs and compliance with currency trading. A greater spread of so-called algorithm trading may also have supported the development towards electronic trading.

It is trading on so-called "multidealer" electronic trading platforms that accounts for the increase in electronic trading and accounts for 41 per cent. of the total foreign exchange trade. Here, customers can ask a number of banks to set purchase and sale prices at the same time, after which the customer can complete a currency trade by clicking on the price at the desired bank

Dollar and euro still dominate

Most of the currency trading in Denmark does not involve Danish kroner. The dollar is the most dominant currency in the Danish foreign exchange market and is included in 74 per cent of the total turnover, while the euro is included in 49 per cent  of the transactions in the Danish foreign exchange market. Transactions between the euro and the dollar alone account for 28 per cent. The large trade in the dollar and the euro on the Danish foreign exchange market reflects that these are the two largest currencies globally.

Every three years, the Bank for International Settlements (BIS) conducts a survey of the global foreign exchange and interest rate derivatives markets in collaboration with a number of central banks worldwide. The survey consists of two parts: a turnover part and a holdings part. The focus here is on the survey of the turnover in the foreign exchange market.

The banks reporting to the survey are all major banks and foreign exchange dealers (investment firms) that have a trading desk in the country in question, i.e. that branches and subsidiaries of foreign banks are also included in the local data collection. Danmarks Nationalbank is responsible for collecting data for the Danish foreign exchange and derivatives markets and has participated in the survey since 1989.

In 2022, more than 1,200 banks in 52 countries participated in the global survey, with 8 of the banks being located in Denmark.

The reporting institutions report the total gross turnover for April, after which the average daily turnover for the month is calculated by dividing the total turnover by the number of banking days in the month. When concluding a contract, the reporting institution registers the transaction and converts it into dollars. Here, a conversion has been made into Danish kroner using the average exchange rate between the dollar and the Danish krone in April.

In the turnover figures, all foreign exchange transactions are calculated at the nominal value of the contracts or the nominal value of the underlying asset, the so-called notional value. Furthermore, no distinction is made between purchases or sales. At the same time, all transactions have been registered on the trading day.

Foreign exchange market instruments

The foreign exchange market survey includes trading in the following products:

• Spot transactions are foreign exchange transactions that involve the exchange of two currencies at an exchange rate agreed on the trading day. The currencies are exchanged for cash settlement within two banking days.
• Forward transactions are foreign exchange transactions that involve the exchange of two currencies at an exchange rate agreed on the trading day. The currencies are exchanged for cash settlement at a specified time in the future.
• For example, swaps are forward exchange transactions that consist of a spot transaction combined with an off-setting forward transaction.
• Currency swaps are foreign exchange transactions in which interest payments in two different currencies are exchanged on an ongoing basis and where principals are exchanged at the start and end of the contract.
• Foreign exchange options are option contracts that give one party a right, but not an obligation, to buy or sell a currency against another currency at a pre-agreed exchange rate over a period specified in advance.