The low volatility era of the foreign exchange market is back, and the "pick up money" game is gaining favor again! G10 currency arbitrage trading is back in favor.

Despite frequent fluctuations in the global markets due to risk events, arbitrage trading - buying high-yielding major currencies and selling low-yielding currencies - is currently experiencing its best performance in years. This reflects a combination of factors, including low volatility in the foreign exchange markets, significant interest rate differentials between developed economies, and the fact that the Japanese yen has not received safe-haven support from the Middle East conflict. The significant interest rate differentials between the Group of Ten (G10) developed economies make arbitrage trading between these currencies more attractive. This is a stark contrast to the environment during the COVID-19 pandemic when global interest rates were generally close to zero. Calculations by Citigroup show that if investors were to buy the top 5 G10 currencies with the highest interest rates and sell the 5 currencies with the lowest interest rates this year, the return rate would be slightly above 4% without the use of leverage. Kristjan Kasikov, Head of Citigroup's FX Quantitative Investment Solutions, said, "Since the global financial crisis, (developed market arbitrage trading) has hardly made any money, so the current surge we are seeing is quite unusual." "In a year filled with uncertainty and constantly changing market sentiment, this is particularly worth paying attention to." Interest rate differentials are back in the market's core Interest rate differentials are supporting some major currencies. Both Australia and Norway are currently in a cycle of raising interest rates, with policy rates above 4%; the UK's benchmark rate is slightly lower than this level. Japan's benchmark rate is less than 1%, and Switzerland's benchmark rate is 0%. Since the beginning of this year, the Australian dollar has risen by nearly 9% against the US dollar, the Norwegian krone has risen by 10% against the US dollar, and the British pound has risen by 1% against the US dollar. Meanwhile, despite recent interventions by Japanese authorities, the yen continues to weaken against the dollar due to the drag of high energy costs. Morgan Stanley expects the pound to remain stable against the dollar, but sees more intense competition from the Australian dollar and Norwegian krone as the latter two are "better arbitrage trading targets." Stephen Jen, CEO and Co-Chief Investment Officer of Eurizon SLJ Asset Management, pointed out that the low interest rate environments in Japan and China compared to the US are further driving arbitrage trading. Jen said, "FX arbitrage trading has always been very popular. The yield differentials are large enough that not only short-term traders can benefit, but even long-term funds and corporate finance departments can profit from it." Kaspar Hense, Senior Portfolio Manager at RBC BlueBay Asset Management, stated that although the firm has maintained long positions in the Australian dollar and Norwegian krone, the main reason is that these countries are major commodity exporters and can benefit from rising commodity prices. Low volatility in the FX markets The strong performance of arbitrage trading also reflects the overall calmness in the foreign exchange markets, despite the surge in energy prices and sell-offs in government bonds due to the Middle East conflict. Volatility is usually not favorable for arbitrage trading as currency fluctuations may erode the profits from interest rate differentials. Investors suffered heavy losses in 2024 when the yen suddenly surged during a summer calm market, destroying arbitrage trading and leading to a global stock market crash. Now, the rise in the stock market driven by tech stocks is helping to reduce volatility in both the stock and foreign exchange markets. The three-month volatility of the euro against the dollar, the largest traded currency pair globally, is currently around 5.6%, lower than the high point of 7.8% in March. During the tariff shocks in April 2025, this indicator surpassed 9%, and during the aggressive rate hikes by global central banks in June 2022, it briefly exceeded 12%. The volatility of the dollar against the yen is also currently low. Despite recent interventions in the Japanese FX market leading to a rebound for the yen, traders are taking this opportunity to sell yen at higher levels, thus the impact on arbitrage trading is not significant. Kristjan Kasikov said, "The weakening of the yen's safe-haven properties means that even with a significant increase in risk aversion sentiment in March, arbitrage trading performance has not been significantly affected - which historically should have caused a noticeable impact." Hedging factors For a long time, the yen and the Swiss franc have been financing currencies in arbitrage trading, but the logic behind high-yielding G10 currencies is more complex. Although the Australian dollar has higher interest rates, Alvise Marino, FX strategist at UBS, said that the recent rise in the Australian dollar was not driven by traditional arbitrage trading. He said, "If investors just want to profit from the interest rate differential between two currencies, they are more likely to buy currencies like the Brazilian real or the South African rand." He also added that the interest rate differentials among G10 countries mean that Australian investors holding US assets can still make positive returns after hedging against the risk of US dollar depreciation. This will increase their willingness to hedge against foreign exchange risk, thus creating a favorable flow of funds for the Australian dollar. As the US stock market continues to rise, the importance of this logic will persist, especially in the general expectation of a weakening US dollar. Kit Juckes, Chief FX strategist at French Industrial Bank, said, "The real challenge for overseas investors holding US assets is the cost of hedging currency risk." "Therefore, it is not difficult to understand why currencies like the Norwegian krone and the Australian dollar, which have lower hedging costs due to their lower domestic interest rates, are currently performing well."