The yen has become more range-bound following its dramatic fall earlier in the year, creating a lull in FX market activity during the western summer weeks The foreign exchange market is in the middle of a significant lull in trading activity as volatility and volumes have dipped simultaneously during July and August for the first time in several years, according to senior FX traders. Some majors are still moving and sterling bounced this week, following the press conference with Bank of England governor Mark Carney during which he revealed interest rates would not rise until unemployment falls below 7%. But the dramatic weakening of the yen, which drove a welcome increase in trading volume earlier this year, has flattened in recent weeks, with USD/JPY now generally range-bound between 95 and 100. "My view is August will be really quiet, at least until the next Federal Reserve Open Market Committee (FOMC) minutes and the Jackson Hole meeting. Volatility will be extremely low and volumes lower. Liquidity is also very poor, as the heavy swings from this week's policy announcement from the Bank of England showed. Volumes are not so heavy, so the equilibrium towards low volatility is quite fragile," says Gian-Luca Fetta, head of FX at Société Générale Corporate and Investment Banking in London. A decline in activity in yen and euro crosses certainly appears to have affected EBS, which reported average daily volume had dipped to a record low of $89.3 billion in July. Meanwhile, Thomson Reuters revealed this week that average daily spot volume on its platforms fell from $147 billion in June to $114 billion in July, while volume on FXall dropped from $123 billion to $102 billion. "The market has been quite reliant on USD/JPY from a volume perspective, and that has been fairly range-bound recently. If you look at recent central bank surveys, yen volume showed an enormous surge over the six months [between October 2012 and April 2013], but compared with July, yen was fairly stale, which has taken a lot out of the market. The average EUR/USD weekly range, which is a fair part of market volume, has also been less than normal," says Darren Coote, global head of FX spot trading at Lloyds Banking Group in London. "The yen was certainly a big driver of those volumes at the beginning of the year, and personally I don't see a big jump in volumes for now unless a central bank comes out with any big news, like the Bank of England did on August 7, which made some big waves in sterling," adds Richard Anthony, global head of FX e-risk at HSBC in London. Investors report that the recent uncertainty surrounding central bank announcements – particularly those made by Federal Reserve chairman Ben Bernanke over the planned tapering of quantitative easing (QE) – have made it harder than usual to trade currencies. "There was definitely some nervousness in the FX market last month, mainly triggered by the FOMC comments on QE tapering. This was clearly a market shock that led to volatile moves, and in turn reduced liquidity and lowered volumes as traders became more conservative. Bernanke's clarification the following week actually created more uncertainty and as markets rallied back, volumes then dried up," says Mankash Jain, head of FX at Solo Capital in London. The mixed signals coming from central banks, coupled with the natural slowdown during western summer time, has led both buy-side and sell-side participants to scale back their risk positions and limit their exposures until markets are expected to pick up again in a few weeks' time. "At this time of year the markets are fairly illiquid due to summer vacations, while most trading houses were looking for clarity and are in a wait-and-see mode, pending the various central bank meetings. We think this will all change fairly soon and turnover will increase substantially once senior personnel return and portfolio adjustments need to be made," says John Birkins, chief executive of Mercury Forex in Switzerland. A sell-off in equities during May and early June saw investors cut positions, resulting in reduced risk appetite across the board, adds David Jones, head of FX trading at National Australia Bank in London. "We look at volatility as a way of determining how much risk we run anyway. We saw that volatility spike in May and we reduced our absolute risk positions then. We are coming to the end of the financial year in September and we probably won't run the kind of risk positions we were running earlier in the financial year," he says.

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