Commerzbank’s Thu Lan Nguyen highlights a renewed surge in FX carry trades, driven by investor optimism for an imminent end to the Middle East war, despite an agreement between the US and Iran still pending [1]. This optimism has led to increased boldness among investors, with a notable comeback of carry trades in the FX market [1]. The carry trade strategy, which involves going long on higher-yielding currencies against lower-yielding ones, has recently delivered clearly positive returns, especially since April of last year [1]. Strategies focusing on the three highest-yielding G10 currencies versus the three lowest-yielding G10 currencies have been profitable, with even better performance observed in selected emerging-market currencies [1].
Nguyen cautions that while the appeal of carry trades is strong, long-term returns are not solely driven by interest differentials. Exchange rates are generally more volatile than interest rates, meaning that exchange-rate movements can significantly outweigh interest income [1]. She notes that theory argues against persistent excess returns, but recent practice has shown a winning streak for carry trades, echoing periods in the 2000s when such strategies were extremely profitable [1].
Despite the recent gains, there are divergent outcomes between JPY and CHF funding strategies, suggesting that not all carry trades are equally successful [1]. Nguyen advises investors to consider fundamental arguments for currency appreciation or depreciation rather than blindly following trends, emphasizing the importance of selective opportunities in the current environment [1].
CONCLUSION
FX carry trades have seen a resurgence amid hopes for Middle East peace, delivering strong returns in both G10 and emerging-market currencies. However, Commerzbank warns that long-term profitability is not guaranteed and urges investors to focus on fundamentals rather than chasing trends. The market impact is medium, with sentiment leaning positive but tempered by caution regarding sustainability.