Carry Trade Is Powering On as Investors Sidestep Yen’s Gains
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Emerging-market carry trades, some of this year’s most popular foreign-exchange bets, are showing resilience even after joint US-Japan currency intervention dented the appeal of this yen-funded strategy.
The Bloomberg EM FX Carry Risk Premia Index has fallen about 1% since Japan used direct action to bolster its currency, about the same as a similar benchmark for Group-of-10 currencies. That’s a far cry from the 4% the EM carry measure fell in August 2024, when a sharp yen rally roiled global markets as traders rushed to repay their yen-denominated borrowings.
The muted response has eased fears of a repeat of the 2024 blowup, and shows that investors have diversified away from the yen, tapping currencies such as the euro and the Swiss franc to finance purchases of high-yielding assets in emerging markets. While the Brazilian real has slumped nearly 4% against the yen since intervention began, it’s little changed against the dollar and almost 1% lower versus the euro.
“The bar for a disorderly carry unwind is higher than we thought a few weeks ago,” said Thierry Larose, a portfolio manager at Vontobel in Zurich. “For now, I’d carry on but stay away from the yen.”
Larose said he’s been using the dollar and the euro to pay for bullish developing-market positions while avoiding shorting the yen. He doesn’t view the Bank of Japan as “ready to turn hawkish,” but sees the currency as undervalued, making it less attractive to borrow in given its scope to strengthen.
The yen has traditionally been a go-to currency to fund carry wagers, given that interest rates in Japan were around zero for decades. The BOJ’s benchmark, at 1%, remains the lowest in the Group of Seven.
However, the central bank has signaled the possibility of a hike in September. The energy shock sparked by the Iran war has helped fan inflation worries in Japan, an oil importer, and the cheap yen has added to that pressure. On Wednesday, oil prices and the dollar slipped on cautious optimism that the US and Iran are nearing a deal to reopen the Strait of Hormuz.
The yen was little changed at around 157.77 per dollar on Wednesday. It reached about 164 last week, its weakest since 1986, before the US and Japan stepped in to bolster it.
The euro is also an appealing base currency because the region’s benchmark rate, at 2.25%, is lower than the Federal Reserve’s range for its target, of 3.5%-3.75%.
Wells Fargo, in the meantime, is selling the low-yielding Swiss franc against the yen. It’s a bet that Japan’s policy shift, however slow, will keep the yield on the currency higher than the franc’s rock-bottom rate. The bank is targeting the currency pair to fall nearly 4% to around 188, a level last seen in October.
Goldman’s Preference
Goldman Sachs Group Inc., which last month said carry trades faced the best conditions in more than two decades, said in a note at the end of July that it still sees room for the strategy to run.
The bank cautioned, however, that investors should choose “both longs and funders carefully,” while monitoring local developments that could undermine returns. Its preferred financing sources in developed markets are the Swiss franc, the euro and the Canadian dollar, in that order.
The threat of further intervention in the yen supports a shift toward the euro and the franc as “funders of choice,” Morgan Stanley strategists told clients this week, even as US Treasury Secretary Scott Bessent said Washington remains in close contact with Tokyo.
What Bloomberg Strategists say…
“Japan’s intervention in the yen may not do much to shift the currency, which has all the weight of interest rate expectations against it, but what it will achieve is to discourage carry traders from using the currency to borrow in. By injecting volatility into the funding leg of the trade, Japan’s Ministry of Finance pushes up the risk of carry trades.”
—Sebastian Boyd, Macro Strategist, Markets Live
For the full analysis, click here.
One version of the carry trade that’s in favor this year — borrowing in euros to buy a basket comprising the Brazilian real, Colombian peso and Turkish lira — is still up roughly 19% in 2026, the most year-to-date since 2005, data compiled by Bloomberg show.
Even though the financing strategy’s appeal has faded, some carry trades are still funded in yen and a more sustained rally in the Japanese currency could force more unwinds.
Still, it’s not like before August 2024 “when everything was funded out of yen,” said Daniel Tobon, a strategist at Citigroup Inc.
Investors can still earn attractive carry by borrowing in Australian dollars to fund long positions in currencies such as Brazil’s real, he said.
“We’ve seen a diversification of funding currencies, and that’s likely to continue.”
–With assistance from Naomi Tajitsu, Aline Oyamada and Umesh Desai.
(Updates markets, adds strategist comment.)
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