* London FX daily average turnover rises 12%
* Experts say rush to hedge portfolios boosts trading
* Dollar/yuan volumes eclipse euro/sterling again (Adds context, details, analyst quotes)
By Olga Cotaga
LONDON, July 23 (Reuters) – Britain’s daily foreign exchange turnover rose to a record high in April, the Bank of England said on Tuesday, as investors concerned about central bank policy U-turns sought to protect their portfolios.
The BoE’s semi-annual survey, which showed daily average FX turnover in Britain jumped 12% to $2.86 trillion in the six months to April, underlined the rude health of London’s foreign exchange industry despite worries about the impact of Britain’s departure from the European Union.
London’s forex market, the world’s biggest, is the crown jewel in Britain’s financial services industry.
The biggest contributors to the record volumes were a 23% jump in foreign exchange swaps to $1.46 trillion since October 2018 and an 18% rise in currency forwards.
The surge in turnover came during a volatile period for financial markets as stocks sold off heavily in December, forcing the world’s major central banks, led by the U.S. Federal Reserve, to take a U-turn in tightening policy.
However, volatility has been stuck near multi-year lows as central banks appeared to turn dovish in tandem, removing the policy divergences that investors betting on forex markets like to see.
UBS Wealth Management forex strategist Daniel Trum said U.S. interest rates were still among the highest in the developed world even as markets price in Fed rate cuts.
The jump in turnover was “very likely due to hedging activity given the high interest rate differential with the U.S.,” he said, pointing to U.S. investors in the UK and British investors in the United States as the likely most active.
Uncertainty surrounding Britain’s departure from the European Union had also supported volumes, Trum added.
Volumes in spot and non-deliverable forwards were broadly stagnant over the six months, according to the BoE survey.
Turnover in euro/dollar and sterling/dollar currency pairs rose by 18% and 16% respectively, posting a record average daily high.
Dollar/Chinese yuan turnover increased by 6%, and trading in the currency pair again represented a larger market share than that of euro/sterling.
The growth of offshore yuan trading, albeit from a low base, above euro/sterling volumes comes despite many participants using the single currency and pound to express their view on the Brexit negotiations. (Reporting by Olga Cotaga; Editing by Tommy Wilkes and Jan Harvey)