(Bloomberg) -- Traders will need to write a new playbook soon as the days of one of the year’s best-performing foreign exchange strategies are numbered, according to JPMorgan Chase & Co. 

This year currency speculators piled into carry trades — in which they borrow low-yielding currencies in order to purchase higher-yielding alternatives — earning some of the strategy’s best returns in decades as global central banks continued an aggressive pace of rate hikes in the face of mounting inflation.  

Looking into 2024, G-10 central banks are preparing to ease monetary policy, sending global yields tumbling with the highest yielders cutting deepest and dragging on carry returns in the process, JPMorgan strategists led by Meera Chandan wrote in the bank’s annual foreign exchange outlook released Tuesday.

“2023 will be a year remembered for many things, but for FX market participants it shall forever be known as the golden year for carry,” the report said. “2024 should be the beginning of the end as high-yielders cut most. Declining yields will make carry less attractive and a narrower theme.” 

Read more: Carry Trade Mints 42% Profit and Sparks Push Into New Market

Between January and June of this year, the strategists wrote, a nominal carry basket of 27 currencies returned gains of more than 20%, the best half since 2003. 

While carry strategies haven’t performed as well in the second half as US yields remained high while those in Latin America fell — the same basket has only returned 0.4% — the first-half surge was enough to confirm the importance of rate differentials in driving currency moves. 

Next year, JPMorgan expects relative currency valuations to converge, reversing many of the trends seen in 2023. In both market downturns and rallies, the strategists wrote, “the trades which screen with the largest upside are involving rich or distressed G10 currencies.” 

  • JPMorgan expects the dollar to be “bumpy but elevated” and recommends cautiously buying dips, given swings in the US outlook from exceptionalism to recession.
  • Central bank rate cuts should ease the pressure on currencies in highly-leveraged economies and carry funders, “particularly the lower-yielding, G10 high beta FX that are now cheap,” the strategists wrote.
  • While FX volatility has scope to remain low into the first half, JPMorgan recommends vigilance around two key wildcard risks: a potential US recession and the US presidential election.

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