Carry Trade Shifts Away from Yen, Swiss Franc Amid Low Volatility

The carry trade has undergone significant changes in recent years, but it is not dead. In fact, investors are shifting away from traditional funding currencies like the Japanese Yen and Swiss Franc towards higher-yielding emerging-market currencies.

According to MUFG, low volatility and wide rate gaps have revived FX carry trades, with investors favoring currencies such as the Brazilian Real, Hungarian Forint, and Egyptian Pound. These currencies offer high domestic yields and stable financial market backdrops, making them attractive for carry trades.

The traditional short-Yen trade has become less comfortable after coordinated intervention drove a violent Yen rally, reminding markets that policy risk matters just as much as interest-rate differentials. Goldman Sachs estimates that the latest intervention was 'very different' in both scale and coordination, with roughly $100bn-$110bn of action over three days.

Analysts warn that carry trades are not risk-free, citing Fed uncertainty, geopolitics, oil prices, AI-related volatility, and thin summer liquidity as potential downsides. MUFG also notes that exceptionally low FX volatility is unlikely to last, and a larger energy or equity shock could quickly revive demand for the Yen and Swiss Franc.