Analysis-Carry on trading: rate-based G10 currency bets make a comeback

By Alun John and Dhara Ranasinghe

LONDON, May 15 (Reuters) – The carry trade, where investors buy high-yielding major currencies and sell low-yielding ones, is having its best run in years, even with major risk-driven moves in global markets.

This reflects a combination of low currency volatility, large gaps between interest rates in developed economies and ‌the yen not getting a safe-haven lift from the Iran war.

Large rate differentials among Group of 10 (G10) developed economies are making carry attractive between those currencies, unlike during ‌the COVID-19 pandemic when rates were near zero globally.

Citi calculates buying the five G10 currencies with the highest rates and selling the five with the lowest, without any leverage, would have returned just over 4% so far this year.

“Since ​the global financial crisis it (a developed market carry trade) hasn’t made any money, so this uptick that we have seen is unusual,” said Citi’s head of FX quant investor solutions, Kristjan Kasikov.

“It’s quite remarkable in this year of uncertainty and shifting sentiment.”

Carry trades are popular with a range of investors including hedge funds.

RATE DIFFERENTIALS ARE BACK

Interest rate gaps are helping some major currencies.

Australia and Norway are in hiking mode, with policy rates above 4%. Britain’s is just below that, while Japan’s is under 1% and Switzerland’s is 0%.

The Aussie dollar has jumped almost 9% against the greenback so far this year and ‌the Norwegian crown 10%, while sterling is up 1% and the ⁠yen has weakened, also hurt by high energy costs.

Morgan Stanley expects sterling to prove stable against the dollar, but it faces “increased competition from the Australian dollar and Norwegian crown as ‘better’ carry expressions.”

Stephen Jen, CEO and co-CIO of Eurizon SLJ Asset Management, pointed to low rates in Japan and China, ⁠compared to the U.S.

“Carry trades in FX have been popular. It’s not just short-term traders, but the yield differentials are wide enough for long-only and corporate treasurers to capitalise,” he said, declining to comment on his positioning.

Kaspar Hense, senior portfolio manager at RBC BlueBay Asset Management, said while it has been long the Aussie and crown, that was primarily because the countries are commodity exporters, benefiting from rising raw materials prices.

A ​long ​position bets an asset will rise in value.

CURRENCY VOLATILITY IS LOW

The carry trade’s outperformance also reflects calmer currency ​markets, even as energy prices surged and government bonds tumbled in response ‌to the Iran war.

Volatility hurts carry trades as changes in currencies’ price can outweigh gains from rate differentials.

Investors were burned in 2024 when a sudden yen surge in a quiet summer wiped out carry trades and sent stocks plunging.

Now, a tech-driven stocks rally is helping suppress equity and currency volatility.

Three-month volatility for euro/dollar, the world’s most traded currency pair, is around 5.6%, below a high of 7.8% in March. It hit more than 9% during April 2025’s tariff shock and above 12% in June 2022 when central banks were hiking rates dramatically.

Dollar/yen volatility is also low. Although recent Japanese intervention has lifted the yen, traders used this to sell the currency at higher levels and it has not hurt carry trades much.

“The breakdown of the defensive properties of the ‌yen meant while risk aversion spiked in March, that did not really dent the performance of carry trades ​where historically it may have,” said Citi’s Kasikov.

THE HEDGING FACTOR

The yen and Swiss franc are both long-standing funders for ​carry trades, but high-yielding G10 currencies are more complex.

While the Australian dollar has high ​rates, UBS FX strategist Alvise Marino said it was not carry trades in the traditional sense providing a boost.

“An investor who is trying literally to ‌earn the interest rate differential between the two currencies is more likely to ​buy something like Brazil’s (real) or South Africa’s (rand),” Marino ​said.

Instead, he added, the G10 rate differentials meant that Australian investors owning U.S. assets could now get a positive return by hedging the risk of the U.S. dollar weakening. That makes them more likely to do so, a positive flow for the Aussie.

Australian pension funds have recently increased hedge ratios.

“This is a different type of carry trade compared ​to the one that we usually think about,” Marino said.

As U.S. ‌stocks rally, this will remain important, especially given the market consensus for dollar weakness.

“The challenge for foreign owners of U.S. assets is the cost of hedging FX ​exposure,” said Societe Generale’s chief FX strategist Kit Juckes.

“No surprise then, the currencies with the lowest hedging costs, thanks to domestic rates, are doing OK,” he said, ​flagging the Norwegian and Australian currencies.

(Reporting by Alun John and Dhara Ranasinghe; Editing by Alexander Smith)