Recent volatility in Emerging Market (EM) currencies has generated significant global interest due to shifting capital flows and changing risk sentiment, which influence FX liquidity and pricing and reduce overall trade volume through Forex brokers offering EM currency pairs.
Recent Report
According to a Reuters analysis published today (May 23, 2012), emerging-market currencies are experiencing high volatility due to ongoing global rate uncertainty, mixed economic growth prospects in many nations, and changing investor risk appetites. Increasingly, traders and institutions are taking on more hedging activity due to the unpredictability of currency movements, especially in non-G10 markets.
Why It's Important—Market/Broker Impact
Increased volatility in emerging-market FX typically results in wider spreads and fluctuating levels of liquidity for Forex brokers.
Many liquidity providers will change how they price products, potentially negatively impacting execution quality for both retail and institutional clients.
Forex brokers dealing in emerging-market currency pairs will face increased pressure to manage margins and risk due to the speed of market movements.
WikiLix Insights
The growing volatility of emerging-market currency markets should prompt brokers to pay greater attention to the depth of their liquidity pools, review their risk management policies, and ensure they adequately communicate to clients the risks inherent in boarding emerging-market currency pairs. As capital becomes increasingly selective globally in the future, Forex brokers offering emerging-market pairings should expect to operate in much tighter hedging environments and experience significantly greater liquidity shocks, particularly in 2026.
