Carry trades, a widely used strategy in the $9.5 trillion-per-day currency market, are seeing the best conditions in more than 20 years, according to Goldman Sachs Group Inc. This favorable environment is attributed to unusually wide yield gaps among major developed economies and historically subdued currency volatility. JPMorgan Chase & Co.'s index shows foreign-exchange volatility nearing its lowest levels since 2020. This combination has led G10 FX carry trades to return approximately 8% this year, outperforming global bonds, gold, and Bitcoin, though still trailing stocks.
Goldman Sachs strategist Stuart Jenkins noted that the relevance of betting on carry in the Group of 10 foreign-exchange space is higher than at almost any point since 2000. The firm currently favors funding these trades using the Japanese yen, Swiss franc, or euro, which have relatively low interest rates. For instance, two-year note yields in the US remain above 4%, compared to less than 3% in Germany, 1.4% in Japan, and about 0.1% in Switzerland, creating significant interest-rate differentials. Goldman identifies the yen as a top funding candidate for the longer term, especially as it trades near a 40-year low against the dollar.
In addition to the yen, Swiss franc, and euro as funding currencies, Goldman sees opportunities to buy the dollar against the Swedish krona. For risk-neutral scenarios, they favor purchasing the euro against the Swiss franc, citing its high carry-to-volatility profile, and the Australian dollar against the New Zealand dollar. Jenkins highlighted that some currency trades now offer the potential for interest-rate income while remaining relatively insulated from broader market declines, presenting a useful option for multi-asset portfolios without adding more exposure to equities, especially after a strong run in US stocks.
The appeal of carry trades has been significantly boosted by the stabilization of G10 rates within a range, leading to reduced realized volatility from rate differentials and anticipated limited policy action. Historically, trades offering high carry relative to volatility have been sensitive to stock market performance, but Goldman's analysis indicates this relationship has broken down in recent months. However, the strategy carries risks; a sudden surge in volatility can quickly erase gains or force the unwinding of positions. Barclays Bank Plc has also cautioned that the current calm in currency markets might be at odds with global economic uncertainty, suggesting volatility could rise.
The current year-to-date reading, around 0.70, indicates a strong relationship between carry and overall performance in major USD currency pairs, one of the highest since 2000. Goldman notes that the amount of carry available relative to expected volatility in trades like US dollar-Canadian dollar and euro-Swiss franc is near multi-decade highs. This setup makes currency carry appealing beyond traditional currency market participants, especially for those looking to diversify from heavily equity-exposed portfolios.
