Investors revive carry trades on hopes of de-escalation, but returns vary sharply between JPY and CHF funding strategies.
Investors are revisiting FX carry trades amid optimism over a potential end to Middle East conflicts, driving renewed interest in higher-yielding currencies. The strategy, which profits from interest rate differentials and currency appreciation, has delivered strong returns since April 2023, particularly in G10 and emerging-market baskets.
However, performance diverges notably between funding currencies like JPY and CHF, highlighting risks beyond interest spreads. While recent gains mask volatility, theory suggests persistent excess returns are unlikely, as exchange rate movements often outweigh interest income.
The shift reflects broader risk appetite but underscores the strategy’s sensitivity to geopolitical and macroeconomic shifts.