JP Morgan: Increased volatility and the Fed's policy shift may weaken the attractiveness of currency carry trades

JPMorgan Chase stated that in the long term, the attractiveness of currency arbitrage trading may weaken due to increased volatility and the possibility of the Federal Reserve turning dovish. Analysts, including Meera Chandan, noted in a report that arbitrage trading has suffered significant losses in the past month, "the forces against global foreign exchange arbitrage trading are growing, and potential losses will occur if softening US inflation is confirmed and the Fed shifts to a dovish stance in the future." After the surprising election results in Mexico and India, volatility has increased. Earlier this month, following Claudia Sheinbaum's victory in the Mexican election, the return on the Mexican peso against the Japanese yen arbitrage trading index recorded the largest single-week decline since the outbreak of the pandemic. Analysts stated, "Overall, if the Fed increases the number of rate cuts this year and early next year, the long-term prospects for foreign exchange arbitrage trading will be affected, even for G10 currencies." "However, if the dust settles in emerging markets and whenever the US releases unexpectedly strong economic data, we do not rule out the possibility of a moderate increase in arbitrage trading returns in the short term."