• Bank of America advises investors to focus on specific currency pairs, notably USD/JPY and GBP pairs, rather than broad FX volatility if the Federal Reserve resumes rate hikes.
  • The bank’s strategy is based on historical data showing these pairs experience the most significant volatility around Fed moves, making them attractive for targeted trades.
  • This approach contrasts with a general bet on G10 FX volatility, which may be less efficient in a rising-rate environment.

Selective Opportunities in FX

As the market braces for a potential resumption of Fed rate hikes, Bank of America is urging clients to refine their FX strategies. In a recent note, the bank’s strategists highlighted that while broad G10 volatility may not offer compelling risk-reward, specific currency pairs are poised for outsized moves. “Our analysis shows that USD/JPY and GBP pairs have historically exhibited the highest volatility around Fed tightening cycles,” said a strategist familiar with the note. “Rather than taking a directional bet on the entire market, we recommend targeting these specific pairs to optimize returns.”

The recommendation comes as investors reassess their portfolios amid shifting rate expectations. With the Fed’s next move uncertain, BofA’s research suggests that a more granular approach could yield better results than a blanket volatility play.

Historical Patterns and Market Dynamics

Historical data supports BofA’s view. During previous hiking cycles, the yen and sterling have been particularly sensitive to U.S. rate differentials. For instance, when the Fed raised rates in 2018, USD/JPY saw an average monthly volatility of 9.5%, compared to 7.8% for the G10 average. Similarly, GBP/USD volatility spiked during the 2004-2006 tightening period, often exceeding 10%.

Market participants are taking note. “The rationale is sound,” said a currency trader at a European bank. “If you’re looking for bang for your buck, these pairs offer more action than, say, EUR/USD during Fed hikes.” However, some caution that such strategies come with risk, especially given uncertainties surrounding the Bank of Japan’s policy stance and ongoing Brexit fallout.

Implications for Investors

For institutional investors, this guidance suggests a shift from passive hedging to active trading. Asset managers may need to recalibrate their risk models to account for pair-specific volatility. Additionally, BofA’s note could influence flows into options products focused on these currencies.

While the note does not provide specific entry or exit points, it underscores the importance of staying nimble in a changing rate environment. As one analyst put it, “This is a call for precision, not broad strokes.”

We reached out to Bank of America for further comment, but they declined to elaborate beyond the note.

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This article was updated at 10:30 a.m. ET to include additional historical volatility data.