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China's Devaluation the Touch Paper for Currency Markets

China’s yuan devaluation last month sparked off a busy summer currency markets, and volatility is set to continue into the fall.

Data released Thursday by ICAP Plc, which runs one of the largest trading platform for currencies, shows that global foreign exchange trading volumes on its platform soared by 22% in August from the previous month, to average $100 billion a day.

This is an increase of 17% compared to August last year, and the busiest August since 2011.

“Market volatility picked up during the second week of August when China’s central bank actions took place, impacting volumes in both major and emerging markets currency pairs,” ICAP said Thursday. The broker also reported record trading volumes for China’s currency, the yuan, and Asian forward instruments.

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On Aug. 24, when global stock markets plunged on fears of China’s slowdown, ICAP reported its second highest daily volume so far this year, beaten only by Jan.15, when the Swiss National Bank rocked currency markets by abandoning its cap on the euro.

The spike in trading volumes comes in a traditionally slow month for financial markets, as many traders take a holiday break in August.

The uptick in volatility continued through to the end of the month, said ICAP, and analysts and investors are bracing for more currency swings ahead.

“Volatility in foreign exchange [will] stay close to its high for the years until September and October are out of the way,” says Stephen Gallo, at Bank of Montreal. This, he adds, assuming the U.S. Fed hike in rates will be announced then. “Once the first rate hike is delivered, and the Fed communicates a ‘gentle path’ of rate rises going forward from there, the result should be a bit of a catharsis for the financial markets, because the act of lifting rates takes away the uncertainty,” he says.