BNY's Geoff Yu highlights that the iFlow Carry index briefly reached negative statistical significance last week, indicating a strong inverse alignment between currency sales and their corresponding 10-year bond yields, as investors sold nine out of fifteen high-yield currencies. This shift suggests that profit-taking is building after a period of resilience in carry trades, with most flows representing 'trimming' or light profit-taking, and only the Colombian Peso (COP) experiencing strong selling (flow magnitude above 1.0) during the week [1].
Yu notes that central banks are now signaling weaker demand and the likelihood of future rate cuts, which could prompt markets to unwind emerging-market carry long positions more rapidly if they anticipate this shift in the second half of the year. He warns that if the carry trade theme preempts this outcome, profit-taking could accelerate quickly, especially in emerging markets where most positions are concentrated [1].
Despite this, the iFlow Carry indicator has not yet shown an extended period of negative statistical significance in 2024. Yu references two previous episodes of negative significance in 2022–2023, which were linked to reactions to 'liberation day' tariffs in Q2 and AI-related valuations in Q4, both occurring during periods of aggressive central bank tightening in response to demand expansion [1].
The current environment, with central banks shifting towards easing and signaling weaker demand, marks a potential turning point for the carry trade's return profile. The balance of risks is moving towards stimulating growth and lowering nominal rates, which could undermine the resilience of carry trades seen earlier in the year [1].
CONCLUSION
Profit-taking risks are rising for carry trades as central banks signal weaker demand and potential rate cuts. While the iFlow Carry index has not yet shown sustained negative significance in 2024, the market appears increasingly cautious, especially regarding emerging-market positions. Investors should monitor central bank signals closely as the risk of accelerated unwinding grows.