Disappointing earnings at the trading divisions of investment banks like Goldman Sachs underscore the slowdown in trading revenues, including forex revenue.
The slowdown is particularly acute in G10 currencies: the U.S., Australian, Canadian and New Zealand dollars, the euro, yen, Swiss franc, sterling and the Swedish and Norwegian crowns.
Data compiled exclusively for Reuters by analytics firm Coalition show the 12 biggest investment banks made $8.4 billion in revenues from emerging-market forex last year, against $7.9 billion (£6.1 billion) from G10.
Coalition data go back only to 2010, but Coalition's head of research, George Kuznetsov, said that before 2010 emerging-market revenues would always have been lower than revenue from trading the major currencies.
Graphic - Emerging market FX revenues outshine G10 :
For an interactive link to the graphic :https://tmsnrt.rs/2VMckWo
"Emerging markets had an exceptional year," Kuznetsov told Reuters. Preliminary data for the first quarter of 2019 suggest emerging markets were again outperforming - G10 revenues are down nearly 10 percent; developing-market revenues are flat or marginally lower, Kuznetsov said.
"In 2019, I would expect relatively similar [revenues], but it will be difficult to exceed 2018 levels," he said. Trading in G10 currencies was likely to rely on "one-off" volatility, he said.
Emerging-market forex revenue in 2018 was the third highest since at least 2010, according to Coalition; G10 revenues were second worst. Foreign exchange revenue overall topped $16.3 billion in 2018, the fourth worst year in nine, Coalition said.
Forex earnings are being squeezed by declines in trading volumes and volatility. Banks wring more money from volatile markets, as clients trade more. But currency volatility has plummeted to five-year lows as major central banks, from the United States to New Zealand, turned dovish.
For example, the euro/dollar exchange rate -- the world's most-traded currency pair -- has just seen its narrowest quarterly trading range since the single currency's inception.
"There doesn't appear to be a major direction (in G10 markets) at the moment, and volumes are down," said a senior foreign exchange trader at a European bank. "It feels very competitive. People are fighting for market share."
By contrast, Turkey's currency crisis last August sparked months of heightened volatility in the lira. The Mexican peso and Brazilian real moved sharply amid political changes. South Africa's rand has yo-yoed before next month's election.
The growing role of expensive automated trading systems in G10 markets has suppressed already wafer-thin margins. Less liquid emerging-market currencies, on the other hand, often can be traded on the phone, making profits higher.
Banks in London, the world's forex trading centre, have in recent years maintained or expanded emerging-market trading teams while cutting G10 teams, industry executives say.
Policy expectations for the Federal Reserve have "solidified for the medium term", keeping the dollar in a range, said Valentijn van Nieuwenhuijzen, CIO at Dutch investment house NN Investment Partners. "But emerging markets offer opportunities and we are seeing pockets of value."
Weakness in FX revenue is reflected across banks' broader fixed-income businesses, although increased volatility in emerging markets does not tend to create extra revenue in other asset classes, such as credit.
Goldman Sachs on Monday reported a first-quarter slide in revenue of 13 percent, with the biggest drop coming in the bank's trading business. JPMorgan and Citigroup also reported declines in trading revenue, of 10 percent and 6 percent, respectively.
Bank of America said first-quarter overall trading revenue had declined 17 percent, with fixed income trading down 8 percent.
(Additional reporting by Saikat Chatterjee; editing by Sujata Rao and Larry King)
By Tommy Wilkes