|

Carry trade: Recovery prospects build – BNY

BNY’s Geoff Yu highlights that iFlow Carry has turned negatively significant for the first time in 2026, signalling ongoing unwinding of carry trades but also a potential contrarian opportunity. He argues that improved risk appetite, helped by a Gulf ceasefire and a limited Fed hawkish pivot, could support a strong recovery in FX carry as liquidation completes.

Carry unwinds hint at rebound

"Our iFlow Carry index has moved into negative statistical significance for the first time in 2026. The index is the daily Spearman rank correlation between 32 currency flow indicators and their corresponding local bond yields. This index gauges the strength of flows’ alignment with their corresponding bond yields."

"Current flows indicate that currency flow performance is increasingly negatively aligned with those currencies’ bond yields, i.e. carry trades are unwinding. While this may continue in the near term, we see the alignment as a contrarian signal, indicating that carry trades stand to recover strongly as liquidation runs its course. Recovery in iFlow Carry is also consistent with the improved risk environment given the ceasefire in the Gulf and a limited hawkish pivot from the Fed for now."

"To identify the most attractive currencies in line for mean reversion, we look for those with the biggest potential moves in rankings if carry interest turns strongly positive. BRL longs offer a strong risk-reward profile according to this criterion. The currency is only moderately overheld but has been, by far, the most-sold carry currency over the past month."

"All other high-yielding currencies also remain net long, but flow scores are more subdued. CHF is a similar story case for funders: over the past month it has been well-bought, while its holdings score is now comfortably positive. This is a very rare state of affairs for a currency with zero rates, and – unlike JPY – it is not considered excessively undervalued."

"Already, we are seeing a shift toward improved risk appetite outside of equity markets, and we are particularly attentive to potential gains in FX carry trades as real yields recover. The bigger question is how to reconcile U.S. exceptionalism with improved risk-reward elsewhere, and that is where idiosyncratic factors will matter greatly."

(This article was created with the help of an Artificial Intelligence tool and reviewed by an editor.)

Author

FXStreet Insights Team

The FXStreet Insights Team is a group of journalists that handpicks selected market observations published by renowned experts. The content includes notes by commercial as well as additional insights by internal and external analysts.

More from FXStreet Insights Team
Share:

Editor's Picks

AUD/USD hits eight-month lows below 0.6850 amid bullish USD

AUD/USD stays defensive below 0.6850, hitting an eight-month low in the Asian session on Thursday as the possibility of a steeper Fed rate hike in December helps the US Dollar hold near its highest level since April 2025. Geopolitical uncertainty also supports the safe-haven buck, while the RBA’s cautious, on-hold stance limits the Aussie.

USD/JPY eases from near 160.00 amid looming intervention risks, BoJ hike bets

USD/JPY retreats slightly from an over two-month high as the recent surge back to the 160.00 psychological mark prompted verbal warnings from Japanese authorities and sparked fears of direct FX intervention. Moreover, data showed that Japan’s wholesale inflation picked up again in October, strengthening the case for a BoJ hike in December and lifting the Japanese Yen. However, a bullish US Dollar, bolstered by odds of a jumbo Fed rate hike in December, could cap the pair's downside.



Gold remains a sell-on-rise trade amid steeper Fed hike bets

Gold fades its tepid recovery attempts at the $4,000 level early Thursday, as sellers refuse to budge amid rising expectations of a steeper interest rate hike by the US Federal Reserve at its December monetary policy meeting.

XRP consolidates losses, XLM extends recovery
Ripple (XRP) and Stellar (XLM) show mild signs of recovery on Thursday, but bears continue to weigh on both cryptocurrencies. XRP trades near $1.055 while XLM holds modest gains around $0.148. Meanwhile, weakening on-chain activity caps both altcoins’ recovery prospects, despite improving price action. CryptoQuant’s summary data shows a bearish outlook for both altcoins.
UK GDP is set to show that the economy continued growing in Q3

The highlight of the United Kingdom’s economic calendar this week will be the preliminary estimate of third-quarter Gross Domestic Product, which the Office for National Statistics will release on Thursday. The market is bracing for 0.7% growth in the three months to September, following 0.5% growth in the second quarter of 2026, with the annual rate accelerating to 1.9%, from 1.4% in the previous month.

What the US CPI headline doesn’t tell you about inflation

Brent crude has fallen about a third since mid-October on hopes the Iran war is ending, but diesel, freight and fertiliser costs haven't followed. Those costs reach US consumer prices in stages through 2027 and could keep inflation high after gasoline gets cheaper.