JPMorgan: Safe-haven capital exits, 'currency depreciation trade' cools down across the board

JPMorgan Chase noted in its latest report that the currency devaluation trade, which has been driving recent surges in Bitcoin and gold, is losing momentum.

The team of analysts led by Nikolaos Panigirtzoglou found that investors are withdrawing funds from Bitcoin and gold exchange-traded funds simultaneously. Global institutions are also reducing their exposure to futures markets related to these two asset classes.

Data from Farside Investors shows that Bitcoin ETFs have experienced significant outflows over the past two weeks, a trend that is perfectly synchronized with the movement of gold ETFs. During this period, positions in CME Bitcoin and gold futures also weakened. JPMorgan Chase's analysis suggests that the current changes reflect not a rotation between the two but instead a softening in demand for both asset classes simultaneously.

The so-called currency devaluation trade refers to investors buying specific assets to hedge against risks during periods of heightened inflation concerns or currency weakness. When markets expect governments and central banks to increase fiscal spending, add debt, or maintain loose monetary policies, Bitcoin and gold often benefit as a collective. Since the outbreak of conflict in the Middle East earlier this year, high oil prices have exacerbated fears of a return to inflation, with Bitcoin remaining a primary vehicle for this hedging trade.

The current withdrawal of funds reflects a cooling of market expectations for deteriorating inflation, largely thanks to signs that the tense situation between the United States and Iran may ease. Investors are currently pre-positioning their portfolios for potential diplomatic agreements between the two countries, thereby reducing the hedging demand that previously supported asset prices. This ebbing of macro risk-aversion strategies marks the temporary end of a speculative frenzy triggered by global turmoil in previous months.