Emerging-Market Carry Trades Accelerate Toward 2026: The Momentum Isn’t Stopping

High-yield currencies are back in the crosshairs. As 2026 looms on the horizon, the classic emerging-market carry trade—borrowing cheap in stable currencies to chase double-digit yields abroad—is roaring back to life. Forget subtle shifts; this is a full-throttle charge into volatility.

The Yield Chase Heats Up

Fund managers aren't just dipping a toe in. They're diving headfirst into markets offering interest rates that make developed-world returns look like pocket change. The strategy is brutally simple: capture the spread. When the gap between, say, U.S. borrowing costs and Brazilian or Turkish yields stretches wide enough, the potential profit drowns out the nagging fear of a sudden currency crash.

Risk? What Risk?

Global calm is the carry trader's best friend. A steady dollar, predictable Fed policy, and muted volatility create the perfect runway. It lets leverage work its magic, amplifying those juicy interest differentials. Of course, this 'Goldilocks' scenario is fragile—a whiff of crisis sends hot money fleeing for the exits, often at a staggering loss. It's the ultimate 'pick up pennies in front of a steamroller' game, but right now, the steamroller seems parked.

The 2026 Horizon

All momentum is pointing forward. With major central banks signaling a protracted pause, the yield disparity fueling these trades isn't vanishing anytime soon. The gravitational pull toward high-growth, high-rate economies will only intensify as the new year approaches, setting the stage for a crowded and potentially volatile run.

In the end, carry trades are a timeless testament to finance's short memory. Everyone knows how the last one ended in tears, yet the siren song of easy money proves irresistible—every single time.

Investors push into high-yield currencies

This year gave investors several strong carry choices as emerging-market stocks, bonds, and currencies posted broad gains. Brazil and Colombia stood out.

Both kept benchmark interest rates at high levels, and both saw their currencies jump more than 13% against the dollar.

The future path, though, depends heavily on the US economy. Investors want slower growth that pushes the Fed to keep cutting rates, which WOULD weaken the dollar further. A recession could trigger a rush out of risk, while a hot economy could revive talk of higher US rates.

“With a weakening US dollar, carry should remain a source of return,” said Wim Vandenhoeck of Invesco. He expects strength in the Brazilian real, Turkish lira, and South Africa’s rand.

On a Goldman Sachs podcast, Brian Dunne said shorting the dollar against the real, rand, and Mexican peso had been a strong call. An equal-weighted basket of that trade gained about 20% this year.

Invesco sold the dollar against the rand and sold the euro against the Hungarian forint, with that position returning around 11% in 2025, including carry. Bank of America pushed into the real versus the Colombian peso, a rate-gap play that earned more than 2%.

Traders track volatility risk into 2026

Another key question is whether FX swings stay calm. Carry trades depend on stable currencies because sharp moves can erase months of returns. Right now, expectations for swings are low.

A JPMorgan gauge of emerging-market currency volatility for the next six months sits NEAR its weakest point in five years. That calm worries some traders who think a rebound is due. “Volatility is very low in a lot of places,” said Francesca Fornasari of Insight Investment. “That’s my only worry, that the benign story is to some degree in the price.”

Bank of America strategist Adarsh Sinha pointed to the US midterm elections and different rate paths across central banks as possible drivers of higher FX moves in the coming months. Even so, the turmoil sparked by President Donald Trump’s tariff announcement in April has faded.

Vanguard said the shock should stay contained next year. “We don’t see enormous bouts of volatility associated with policy instability or recessionary risks,” said Vanguard.

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