- Carry trades in G10 foreign exchange are seeing the most compelling backdrop in more than two decades, Goldman Sachs strategist Stuart Jenkins wrote Thursday — unusually wide and stable yield differentials across developed economies, combined with FX volatility near its lowest since 2020 (per JPMorgan’s volatility index), have created ideal conditions for borrowing in low-yielding currencies (yen, Swiss franc, euro) and investing in higher-yielding ones; the strategy has returned approximately 8% year-to-date, beating global bonds, gold, and Bitcoin, though trailing stocks.
- Goldman currently favors three funding currencies: the Japanese yen (which it expects to continue weakening from near 40-year lows against the dollar absent a macro regime change, with intervention risk ever-present but insufficient to reverse the trend), the Swiss franc (which offers one of the highest carry-to-volatility profiles among major pairs, particularly long EUR/CHF), and the euro; specific trade recommendations include buying USD against Swedish krona (for carry) and long EUR/CHF in “risk-neutral” scenarios, as well as Australian dollar against New Zealand dollar.
- The macro environment driving the opportunity: two-year Treasury yields remain above 4% in the US vs. 2.6% in Germany, 1.4% in Japan, and ~0.1% in Switzerland — some of the widest rate differentials across developed markets — and the Goldman report attributes the durability of these differentials to stabilization in central bank policy rates, with “reduced realised vol from rate differentials, and relatively limited policy action expected ahead” allowing high carry to coincide with subdued volatility in a historically unusual combination.
- The risks are asymmetric and well-known: carry income accrues gradually while currency losses can materialize in minutes, meaning a sudden volatility spike can trigger rapid position unwinding and amplify cross-market stress — Barclays warned separately this week that current FX calm is at odds with elevated global economic uncertainty and that its model suggests volatility is more likely to rise than fall from here, a reminder that the carry trade has historically ended badly when the macro regime shifts.
What Happened?
Goldman Sachs published a report Thursday arguing that G10 foreign exchange carry trades are seeing their most favorable conditions in more than 25 years. Strategist Stuart Jenkins cited the combination of wide and stable yield differentials across developed economies and historically subdued FX volatility. The firm recommends funding carry in yen, Swiss franc, and euro, with specific trades including long USD/SEK, long EUR/CHF, and long AUD/NZD. The strategy has already returned ~8% year-to-date, a strong absolute return for a currency strategy.
Why It Matters?
Carry is one of the most studied and widely implemented strategies in currency markets, but its profitability varies enormously with the macro environment. The current setup — high and divergent developed-market rates, low volatility — is textbook carry-friendly. Goldman’s framing that this is the best backdrop since 2000 is notable because 2000 was also a period when carry worked exceptionally well until it didn’t: the 2008 financial crisis produced one of the most violent carry unwinds in history, with the yen appreciating 30%+ in weeks as leveraged positions reversed. The risk is not that the strategy is wrong now but that the entry point after an 8% YTD run leaves less cushion against a volatility shock.
What’s Next?
The key risk factor to monitor is the US-Iran situation: oil price spikes from Hormuz disruptions would flow through to inflation expectations, potentially forcing central bank policy reassessment and triggering the kind of volatility spike that unwinds carry trades violently. Barclays’ warning that FX vol is more likely to rise than fall is the contrarian read — if realized volatility rises even modestly from current levels, the carry-to-vol ratio that Goldman is highlighting as attractive will compress rapidly. Watch the JPMorgan FX volatility index as the real-time signal.
Source: Bloomberg
