Major investors say the carry trade in emerging markets still has a lot of work to do in 2026. after an exceptional year for this popular strategy.
Lower volatility in foreign exchange markets and a weak U.S. dollar created a fertile environment for this operation, in which investors borrow in low-yielding currencies to buy currencies that offer a higher payout. A Bloomberg index that measures this strategy has returned about 17% this year, its biggest gain since 2009.
Various asset managers and banks – from Vanguard Group Inc. to Invesco Ltd. and Goldman Sachs Group Inc. to Bank of America Corp. – They expect the gap between interest rates in developed and emerging markets to persist next yearwith the Federal Reserve and the central banks of most rich countries keeping borrowing costs low. This scenario is theoretical It is also likely to continue to put pressure on the US dollar, which has lost more than 7% in 2025.
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“The carry trade still offers value, particularly in high yield markets such as Brazil, Colombia and some African markets”said Gorky Urquieta, co-head of emerging market debt at Neuberger Berman. However, after this year’s performance, “the opportunities have become more selective.”
A goldmine of returns
Investors had a wide range of attractive carry options available this year, marked by strong gains in emerging market stocks, bonds and currencies. Countries like Brazil and Colombia – where benchmark interest rates remain high – saw their currencies rise more than 13% against the dollar. Eastern European currencies, from the Czech Republic to Hungary and Poland, posted even larger gains.
The performance of the U.S. economy will be a critical factor in whether this performance continues. Ideally, moderate growth would encourage the Fed to further flex its monetary policy, thereby reducing the dollar’s attractiveness relative to other currencies. A recession could upset this balance by encouraging risk aversion, while a hotter-than-expected economy would bring the threat of interest rate hikes to the table.
“With a weakening US dollar, carry should continue to be a source of returns”said Wim Vandenhoeck, co-head of emerging market debt at Invesco.
Vandenhoeck is optimistic about the Brazilian real, the Turkish lira and the South African rand, among others. In a podcast earlier this month, Brian Dunne, head of FX options trading for the Americas at Goldman Sachs, highlighted the appeal of selling the dollar against the real, the rand and the Mexican peso. An equally weighted basket of this operation has returned about 20% so far this year.
Invesco has sold the dollar against the rand as well as the euro against the Hungarian forint – a trade that returned around 11% including carry in 2025. For its part, Bank of America prefers to buy the real against the Colombian peso, a strategy based on interest rate differentials that has gained more than 2%.
Volatility check
Investors are also checking whether currency fluctuations will remain relatively moderate, an important part of carry trades where an unfavorable currency move can quickly erase months of gains.
Expectations for change are currently low, with a JPMorgan gauge of emerging market currency volatility over the next six months near its weakest level in five years. Paradoxically, this could be a cause for concern for market participants who fear that a recovery is overdue.
“Volatility is very low in many places”said Francesca Fornasari, head of foreign exchange solutions at asset manager Insight Investment. “That’s my only concern, that the positive story is built into the prices to some extent.”
Bank of America currency strategists led by Adarsh Sinha pointed to a number of factors – including the US midterm elections and divergence in central banks’ interest rate policies – that could lead to further currency fluctuations in the coming months.
Still, the market chaos caused by Trump’s tariff announcement in April this year has eased and is expected to remain contained in 2026, according to Vanguard, the world’s second-largest asset manager.
“We do not see any major episodes of volatility related to political instability or recession risks”said Roger Hallam, global head of rates at the company. “This tends to be an environment in which emerging market currencies perform well.”
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