JPMorgan has reported a slowdown in the strategy of buying currencies backed by strong economies. This approach, which was very profitable earlier this year, has lost its momentum. Currencies like the Swiss franc, Norwegian krone, Swedish krona, and Australian dollar have done better than weaker currencies such as the British pound and Japanese yen earlier this year. However, in the past month, the advantage linked to these strong economies has decreased. Even though the economic fundamentals looked promising and long-term bond yields in developed markets have risen, these stronger currencies have struggled. JPMorgan explains this drop is due to changes in short-term yield gaps, which have affected gains. A once-reliable strategy in foreign exchange is now faltering. Most of 2025 was profitable for buying currencies from financially strong countries, like the Swiss franc and Australian dollar, while selling those from economies in trouble, like the British pound and Japanese yen. Recently, however, this strategy has started to lose money. The issue is that short-term interest rate expectations now have more influence than longer-term economic factors. For instance, the yield advantage of 2-year Australian government bonds over Japanese bonds has recently decreased by about 35 basis points, making the Australian dollar less appealing in the short term. This change follows slightly lower inflation data from Australia in August 2025 and a less aggressive approach by the Bank of Japan in its bond-buying. In the UK, short-term bond yields have remained steady as wage growth data from July came in high at 5.9%. This suggests that the Bank of England needs to be cautious, providing short-term support for the pound against stronger currencies like the Swiss franc. The market is now paying more attention to immediate actions from central banks rather than the long-term economic outlook. For those trading derivatives, this shift means that betting on simple currency trends has become riskier. The breakdown of a previously popular strategy has led to increased volatility for currency pairs like GBP/CHF, with 3-month options volatility rising from about 6% to over 7.5% in recent weeks. This suggests that buying options to guard against sudden price changes could be a smart move. Instead of straightforward currency trades, this situation favors strategies that profit from uncertainty, such as straddles or strangles in key currency pairs. We recall the sharp reversals in late 2022; when a market-wide strategy falters, the transition can be chaotic and volatile. It’s not a time for complacency, as the dynamics driving currency markets are clearly shifting.

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