he 1970s were a period of rapid change and innovation in foreign exchange T trading. There was the shift from fixed to floating exchange rates. There was a rapid increase in professional foreign exchange trading in the United States. And, there was the introduction of trading in foreign currency futures contracts.
With the introduction of new foreign exchange trading instruments and techniques continuing to take place in the 1980s, it is important to understand the impact that innovations in currency trading have had on the interbank foreign exchange market. Revey (1981) and Kubarych (1983), among others, have discussed the switch to floating rates and the growth in professional foreign exchange trading in the United States. This article examines the impact of currency futures trading on the interbank market. Recently, some exchange market participants have expressed concern that futures trading may be exacerbating exchange rate volatility in the interbank market.' This article makes several points: 0 The volume of trading activity in the currency futures market is significantly correlated with exchange rate fluctuations in the interbank foreign exchange market. 0 For the Canadian dollar, there is some evidence that the volume of trading activity in the futures market influences exchange rate fluctuations in the interbank market. Arbitrage between the interbank and futures markets seems to be one of the factors which has led to an increase in the relative importance of currency swaps in the interbank market.
'This article was written while the author was an Economist at the Federal Reserve Bank of New York. The views expressed are strictly those of the author and do not necessarily reflect those of the International Monetary Fund or the Federal Reserve Bank of New York. 'For comments, I thank M. Andrews, P. Kuwayama, R. McCauley, B. Roseboro, D. Sobol, and two anonymous referees. For research assistance, I thank C. Cook, F. Marki, and S. Ross. 3See Reier (1983b).