Global forex market resilient - Australia cenbanker

SYDNEY, Feb 16 - Turnover in global foreign exchange remains resilient with the market staying liquid in all but the most intense days of the financial crisis, an official at the Reserve Bank of Australia (RBA) said on Monday.

Chris Ryan, head of the central bank's international department, estimated that total turnover in the forex market had dipped by 5 percent in the six months to October, based on the latest available data, to average around $2.9 trillion a day.

Much of that decline was in foreign exchange swaps, and volumes in the spot market actually climbed 12 percent in the same period, Ryan said in a speech to a global pensions forum.

"Foreign exchange markets, on the whole, have functioned considerably more effectively than many other markets throughout the crisis," said Ryan.

He made no mention of the domestic economy or interest rates in his talk.

One likely cause of the strength in spot forex volumes was the mass unwinding of carry trades, borrowing yen at low interest rates to invest in higher yielding currencies.

One measure of the scale of carry trades was the massive rise in margin trading by retail investors in Japan, which had expended to around $70 billion in the third quarter of last year, seven times the volume two years prior.

Trading by small investors accounted for about 20 percent of total foreign exchange turnover in Japan.

The bulk of such investors used to borrow in yen to buy currencies like the Australian dollar, which was one reason the latter fell so steeply last year as those positions soured.

From the start of August to late November, the Australian dollar fell over 40 percent against the yen. Indeed, so large was the fall that it would have wiped out all profits made on the carry trade in the past five years, he added.

"Market liaison suggests that the unwinding of leveraged carry trades contributed considerably to the sharp depreciation in the Australian dollar," said Ryan.

So great was the volatility on occasions that liquidity all but disappeared, with the gap between bid and ask prices widening significantly as traders pulled back from the market.

As a result, the RBA stepped into buy Australian dollars several times in October and November.

"The bank was not targeting any particular level of the exchange rate but rather seeking to enhance the functioning of the market," said Ryan.

Also boosting currency turnover was widespread repatriation of funds by investors seeking to cover losses at home. Large currency movements could themselves generate turnover as they would be taken as buy or sell signals for investors following algorithmic or momentum-based trading rules.