Currency traders work near a screen showing the Korea Composite Stock Price Index (KOSPI) and the foreign exchange rate between U.S. dollar and South Korean won, top right, at the foreign exchange dealing room of the Hana Bank headquarters in Seoul, South Korea, Monday, Dec. 8, 2025. (AP Photo/Ahn Young-joon)
New York: Big investors say that carry trades across emerging markets have further to run in 2026 following a blockbuster year for the popular strategy.
Ebbing volatility in foreign-exchange markets and a weak US dollar provided fertile ground for the trade, where investors borrow in low-yielding currencies to buy those offering a higher payout.
One Bloomberg measure of the strategy has returned some 17% this year, the biggest gain since 2009.
A bevy of asset managers and banks – from Vanguard Group Inc to Invesco Ltd and Goldman Sachs Group Inc to Bank of America Corp – expect the gap between rates in developed and emerging markets to persist next year, with the US Federal Reserve (Fed) and most other rich-country central banks seen keeping borrowing costs low.
That setup, in theory, should also continue pressuring the US dollar, which has lost more than 7% this year.
“The carry trade still offers value, especially in high-yielders like Brazil, Colombia, and select African markets,” said Gorky Urquieta, co-head of emerging-market debt at Neuberger Berman.
Following this year’s performance, however, “opportunities are becoming more selective”.
Yield bonanza
Investors have had their pick of attractive carry plays this year, which was marked by strong gains in emerging-market stocks, bonds and currencies.
Countries such as Brazil and Colombia – where benchmark interest rates remain elevated – have seen their currencies rise more than 13% against the US dollar.
The US economy’s trajectory is a crucial factor in determining whether that performance continues.
Ideally, investors are counting on subdued growth that will encourage the Fed to continue easing monetary policy, dulling the US dollar’s appeal against other currencies.
An outright recession could upset that balance by stoking aversion towards risk, while a hotter-than-expected economy would put the threat of rate increases on the horizon.
“With a weakening US dollar, carry should remain a source of return,” said Wim Vandenhoeck, co-head of emerging-market debt at Invesco.
Vandenhoeck is bullish on the Brazilian real, Turkish lira and South Africa’s rand, among other currencies.
On a podcast earlier this month, Brian Dunne, head of Americas foreign-exchange options trading at Goldman Sachs, highlighted the appeal of shorting the US dollar versus the real, rand and Mexican peso.
An equal-weighted basket of that trade has returned about 20% year-to-date.
Invesco has been selling the greenback versus the rand, as well as the euro versus the Hungarian forint – a trade that has returned some 11% so far this year inclusive of carry.
Bank of America, meanwhile, likes buying the real against the Colombian peso, a relative rate-differentials trade that has earned more than 2%.
Volatility check
Investors are also gauging whether foreign-exchange gyrations will remain comparatively muted – an important component of carry trades, where an unfavourable currency move can quickly wipe out months of gains.
At the moment, expectations for swings are low, with one JPMorgan gauge of emerging-market currency volatility over the next six months trading near its weakest level in five years.
That, paradoxically, can be a concern for market participants wary that a snapback is overdue.
“Volatility is very low in a lot of places,” said Francesca Fornasari, head of currency solutions at asset manager Insight Investment.
“That’s my only worry, that the benign story is to some degree in the price,” she added.
Bank of America currency strategists led by Adarsh Sinha pointed to a range of factors – including the US midterm elections and a divergence in central bank rate policies – that may drive currency swings higher in the coming months.
Still, the market chaos arising from President Donald Trump’s April tariffs announcement earlier this year has waned and should stay contained next year, according to Vanguard, the world’s second-largest asset manager.
“We don’t see enormous bouts of volatility associated with policy instability or recessionary risks,” said Roger Hallam, the firm’s global head of rates.
“That tends to be an environment in which emerging-market currencies do okay,” he added. — Bloomberg
