Emerging Market Carry Trades Outperform as FX Volatility Stays Low

Emerging market currencies have taken the lead in global FX performance in 2026, as market conditions favor carry trades. According to a recent analysis by WisdomTree's director of digital assets research, Dovile Silenskyte, the strongest returns this year have come from high-yielding currencies rather than traditional G10 pairs. The Brazilian real, benefiting from a domestic interest rate of 14%, has gained 8% against the dollar since January. The Mexican peso and South African rand have also outperformed, supported by stable fundamentals and commodity exposure respectively.

Carry trades—borrowing in low-yield currencies like the yen or franc and investing in high-yield ones—have been unusually profitable. One measure of the strategy was up approximately 12% by April, its strongest start to a year since 2023. The most profitable trade has been borrowing JPY/CHF to buy BRL/MXN/ZAR, capturing the wide interest rate differentials while FX volatility remained subdued.

A more sophisticated approach, known as 'hawkish carry,' has gained traction. This involves buying currencies where central banks are expected to keep rates higher or hike further, rather than simply picking the highest yields. JP Morgan's mid-year outlook favored currencies like the rand, Czech koruna, and Chilean peso, while remaining cautious on Asian currencies.

Commodity price swings have also boosted terms-of-trade trades, improving trade balances for commodity exporters like Brazil and Colombia. Latin American carry trades have been particularly attractive due to a combination of high yields and relative stability.

The stronger dollar backdrop that dominated previous years has reversed, and a weaker dollar tends to loosen financial conditions globally, benefiting riskier assets. As of mid-2026, Latin American currencies are up 19% against the dollar, reflecting capital flows out of crowded US and AI-related trades.

For retail forex traders, these trends underscore the importance of monitoring interest rate differentials and volatility expectations. While carry trade returns can be enticing, they also involve risks of sudden reversals, especially if volatility spikes or central bank policies shift unexpectedly.

Currency impact

The information in this report directly relates to several currencies. The Brazilian real (BRL) and South African rand (ZAR) may continue to be influenced by their high interest rates and commodity price movements. The Mexican peso (MXN) is supported by stable domestic fundamentals. Conversely, the Japanese yen (JPY) and Swiss franc (CHF) are often used as funding currencies, so their performance is tied to global risk appetite and interest rate differentials. Currency pairs such as USD/BRL, USD/MXN, and USD/ZAR may see continued volatility based on these trends, but traders should note that past performance is not indicative of future results.

This is information, not investment advice.