September Expected To Lift FX Trading Gains At U.S. Banks In The Third Quarter, Analysts Say

Foreign exchange trading gains likely surged in September and third quarter results will be more buoyant as a result, analysts and bank officials surveyed agree. Bankers Trust and Morgan Guaranty were most often cited among those most likely to benefit, though Citibank, Chemical, Chase Manhattan and Bank of America are also expected to gain.

"It was an extremely volatile period and trading was the most hectic I've ever seen it," says one foreign exchange official in New York, "those ingredients usually add up to good trading gains." Though July and August weren't particularly memorable, September will likely more than compensate, analysts and officials say.

Bank of Japan and Reuters data (see related article, this issue) underlines the sharp increase in turnover in September. The Bank of Japan reported that average daily turnover in the dollar/yen in Tokyo rose to $6.47 billion in September, up from $4.84 billion in August and $5.66 billion in July. The Bank of Japan also reported that dollar/mark turnover rose to $3.55 billion in September from $2.69 billion.

All that money the central banks spent trying to prop up their currencies must have gone somewhere, industry observers say. "The joke around town is that the Bank of England had to use a shovel to move its reserves into Morgan," says one foreign exchange official, "of course it may not be a joke," he adds. European central banks reportedly spent $100 billion intervening, a good chunk of which most likely found its way into the coffers of the major market participants.

"I doubt we'll see any negative surprises," adds Brown Brothers Harriman banking analyst Raphael Soifer, "the environment was just too good. The question is just what kind of positive surprises we'll see," he adds. "Where I came out at the end of the day was that there was so much volatility, that in some cases it might have turned out to be too much of a good thing, with some banks sitting on the sidelines or even getting caught going the wrong way," he says.

But most are generally optimistic, and some say the September blizzard was good enough to help kick nine-month gains to record levels. Citibank and Chase Manhattan Bank were already posting record foreign exchange trading gains at the end of the first six months of the year (FX Week, July 27) and September's windfall will probably provide an additional push, officials and analysts surveyed say. Analysts however, caution that gains last year during the same period were also impressive due largely to the Russian coup attempt.

Though regional banks likely played it close to the vest in September, those surveyed say turnover in the month was up considerably, and trading gains more impressive as a result. Regional banks tend to have a much lower risk appetite than the large money center banks, and aren't likely to swing as dramatically from quarter-to-quarter as a result. "But we made some money, we'll be paying the light bills for a while longer," jokes a foreign exchange manager in the midwest.

Although bank officials were generally skittish about revealing the size of their foreign exchange trading gains, on average, some estimate they were likely up about 50 percent in September, which for a bank like Citi, could add some $30 million to its three-month total. "Some banks may have had a bad day or a bad deal, but net-net, the commercial banks are smiling, not necessarily an ear-to-ear grin in all cases, but they're content. Some money came into the bottom line, no questions about it," one foreign exchange official in New York says.

Of course, reports have been circulating that Morgan and Citi were particularly successful in September, though officials there declined comment. In fact, a spokesman at one of the largest banks in New York says, "you've got half the people saying we made a killing and the other half saying we got killed, the truth is nobody really knows."