Carry Trade Revival That Electrified EM Spurs 2026 Optimism

“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 dollar. Eastern European currencies from the Czech Republic to Hungary and Poland have seen even larger gains.

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 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 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 in 2025 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%.

Vol Check

Investors are also gauging whether foreign exchange gyrations will remain comparatively muted — an important component of carry trades, where an unfavorable 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.”

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 Trump’s April tariffs announcement earlier this year has waned and should stay contained in 2026, 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.”

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Bloomberg News provided this article. For more articles like this please visit bloomberg.com.

Read more articles by Vinícius Andrade, Carter Johnson