The FX and rates business within investment banks has provided some welcome income for battered balance sheets this year and there’s been a steady stream of recruitment as a result. However, could the good times soon be over?

In its third-quarter results, JPMorgan posted a 19% revenue increase in its fixed income division, due to “record” performance in rates and currencies. It’s a similar story at Goldman Sachs, Morgan Stanley and Citi, which have offset relatively poor investment banking performance with strong FX profits.

However, a research document by Credit Suisse reckons this could soon change as macro hedge funds de-lever among important clients and counterparties. “We have reduced earnings estimates as a result and believe the outlook for the next few years is weak,” it said.

What’s more, brokers have recently raised concerns that the unprecedented levels of volatility have begun to affect daily flows and liquidity in the market

Dominie Moss, head of the FX search practice at Sheffield Haworth, says that recruitment was active within the first half of the year, which was largely down to a wide spread of bonuses within the options space.

She adds: “Despite the fact that FX has been one of the most profitable business areas, it has been difficult for some organisations to get sign-off for new headcount, particularly in the third quarter of this year.”

Neil Price, managing partner at FX recruiter Michael Williams Associates, says: “FX as an asset class has survived in terms of profitability, and indeed exceeded budgets on the whole, and this has in part been reflected in banks’ willingness to hire. However, inevitably, it’s been slower in the latter part of this year.”

The main flurry of hiring activity in London seemed to come after the break-up of Lehman, when Citi snapped up seven people to join its European interest rates business. Headhunters tell us that BNP Paribas, Deutsche Bank and Société Générale also poached some ex-Lehman FX people, and that Standard Chartered stands out as having been actively recruiting.

Price says that clients are still optimistic about prospects for 2009, and that many will continue to hire people opportunistically going forward.

And there will be a shake-up early next year come bonus time, reckons Moss.

“The bonus pool is expected to be quite low although there are always exceptions for top performers. This means either that people want to stay put in an uncertain market and stay where they are known, or conversely look elsewhere to see if they can secure a guarantee for the coming year,” she says.