Banks are holding onto currency deposits and not lending them out on interest due to rampant uncertainty about the global marketplace and central bank activity.
Banks used to participate in currency exchanges. They would lend out excess deposits to foreign investors and in return receive the principle back with interest. Essentially, the banks would earn more capital by lending out money they had lying around.
Currently, banks do not appear to be willing participate in currency exchanges. This could be for a number of reasons: uncertainty in the global marketplace; interest rates that are fluctuating with volatility in parts of the world; and numerous quantitative easing measures.
Hedge funds, mutual funds and corporate treasurers are stepping in to fill the void, The Wall Street Journal reports. These actors are sending their excess funds to Japan, purchasing negative yielding Japanese treasury bills, and are offsetting their losses by jacking up the interest on the dollars they lend out.
There is a great deal of interest to be earned by doing these currency swaps with Japan. At this moment, investors willing to lend out U.S. dollars can earn up to 0.8 percent a year by swapping them for the Japanese yen.
What economists would expect to see is that this opportunity to earn a yield would cause a flood of new investors in the market, but that’s not the case.
A recent study by the Bank For International Settlements could have the answer. The study shows that when central banks aggressively pursue quantitative easing, capital floods across borders. So, while central banks in Europe and Japan continue to pump money into the market, fund managers and corporate treasurers will continue to play in the currency exchange market.
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