Emerging market carry trades have been performing exceptionally well in 2026, marking their longest sustained rally since 2008. This positive trend is fueled by declining volatility in emerging market currencies, which reached their lowest point since the beginning of the year by July 2026. This reduced volatility makes carry trades, where investors borrow in low-yielding currencies and invest in higher-yielding ones, more attractive.
Several factors have contributed to this rally. In January 2026, strategists at major banks like Morgan Stanley and Bank of America Corp. predicted that carry trades would build on last year's 18% returns, which were the largest since 2009. The Bloomberg index tracking eight emerging markets for carry trade returns had already seen a 1.3% increase early in the year. The policies of then-President Donald Trump, which put pressure on the dollar, were also cited as a contributing factor.
Despite a brief setback due to the Iran war, the emerging market carry trade rebounded strongly. By May 2026, an index tracking this strategy had jumped around 2.6% from its March low and gained about 1.2% since the conflict began in late February. This rebound was attributed to surging crude oil prices, reinforcing expectations of elevated interest rates and strengthening currencies of commodity-exporting nations, such as the Brazilian real and South African rand.
Latin American currencies have emerged as particularly safe and attractive for carry trades, offering the juiciest returns due to their higher interest rates compared to other developing nations. This trend continued into July 2026, with collapsing volatility further turbocharging returns across carry trades. However, a recent agreement between Iran and Oman to reopen the Strait of Hormuz introduced new geopolitical risks. The agreement, which reportedly restricts passage for vessels from the US, Israel, and other hostile nations, led to a more than 5% surge in oil prices and caused several emerging market currencies, including the South African rand and Hungarian forint, to plunge. Currencies from Brazil and Mexico also trimmed their gains, and the MSCI index for emerging-market stocks extended its decline on August 6, 2026.
