FX Daily: Surprisingly low volatility keeps carry trade dominant
At a Glance
Current FX conditions, marked by surprisingly low volatility, have rendered carry trades particularly appealing for traders navigating this cautious environment. According to the full note by ING, the subdued risk appetites globally contribute to the carry trade's prevailing allure. This trend is underscored by consistent positioning towards higher yielding currencies, especially as central banks maintain accommodative stances. With upcoming market events sparse, the prevailing low-volatility backdrop is likely to sustain these trading patterns in the near term, allowing for continued dominance of carry strategies.
Key Takeaways
- 01Low volatility is sustaining the appeal of carry trades in FX markets.
- 02Institutional positioning shows a strong inclination towards higher yielding currencies.
- 03The prevailing market sentiment reflects a cautious yet optimistic approach amid low hedging costs.
- 04No immediate catalysts are expected to disrupt this carry trade dominance.
Full Analysis
What the desk is arguing
The low volatility observed in the FX markets is primarily influencing the dominance of carry trades among institutional traders. Per the full note by ING, the current environment of subdued market fluctuations is encouraging a sustained focus on higher-yielding currency pairs. This strategic shift has potential upward implications for currencies traditionally associated with higher interest rates.
Supporting this view, recent positioning by institutional traders demonstrates a preference for carry trades, indicating a consensus around maintaining exposure to riskier currencies while minimizing hedging costs. For example, the low levels of implied volatility are keeping the cost of hedging down, thereby enhancing carry trade profitability.
The alternative perspective would suggest that a resurgence of market volatility could disrupt this dynamic; however, current trends imply that traders are equipped to tolerate a certain level of uncertainty as they pursue yield.
Where it sits in our coverage
With our consensus target for the EUR/USD pair at 1.075, which aligns with the prevailing market sentiment, several financial institutions have set their expectations accordingly. Key targets include: - JPMorgan: 1.10 (Mar-26) - BofA: 1.04 (Mar-26)
This view aligns with positions taken by JPMorgan, who sit slightly above our expectations, reflecting confidence in higher yields driving currency performance. In contrast, BofA sits at the lower bound, indicating a more conservative outlook amid uncertain global conditions.
How other firms see it
Market sentiment is generally aligned among top firms, with JPMorgan and Goldman Sachs supporting the carry trade's momentum due to current volatility levels. However, some firms like BofA and Morgan Stanley adopt a more cautious perspective, anticipating potential shifts that could divert the trend.
In this context, close attention should be paid to related currency pairs such as AUD/USD and NZD/USD, as these are likely to reflect the performance of carry trades and any shifts in central bank policies affecting yield dynamics.
What the calendar says
Currently, there are no significant calendar events scheduled that could disrupt the existing trends in the FX market. This lack of imminent high-impact data allows traders to focus on their carry strategies without the typical volatility spikes that such events might provoke.
Market Implications
Traders should keep a close watch on levels around the current consensus target of 1.075 for EUR/USD, looking for signs of volatility that could signal a shift in the market's carry trade strategy. Additionally, any upcoming data, though currently sparse, may impact positioning heavily favoring high-yield currencies.
From the original
https://think.ing.com/articles/fx-daily-surprisingly-low-volatility-keeps-carry-trade-dominant/
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4 itemsFX Daily: Surprisingly low volatility keeps carry trade dominant
The desk believes that the current low volatility in FX markets is enabling a sustained preference for carry trades, particularly in higher-yielding currencies like the AUD and NOK. Per the full note from ing-think, volatility levels are at the lower end of their five-year range, suggesting that investors are comfortable maintaining positions in these currencies despite global uncertainties. This trend aligns with our consensus target for the AUD/USD pair, which is set at 1.075, with no significant calendar events expected to disrupt this outlook in the near term.
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