FX Daily: Surprisingly low volatility keeps carry trade dominant
At a Glance
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.
Key Takeaways
Full Analysis
What the desk is arguing
ING argues that FX markets are surprisingly calm despite geopolitical and inflationary pressures. Traded volatility is at the low end of five-year ranges, allowing carry trades to remain profitable.
Low volatility discourages hedging and encourages investors to seek yield. This has sustained demand for high-yielding currencies like the Australian dollar and Norwegian krone.
The desk implicitly rejects the notion that the current risk environment should lead to higher volatility. They suggest that without a significant shock, the carry trade will persist.
Where it sits in our coverage
Our coverage does not maintain a consensus target for AUD or NOK specifically. However, we broadly agree with ING that low volatility supports carry trades, aligning with our view that risk appetite remains resilient.
We note that ING's analysis is qualitative and does not cite specific targets, but it complements our own monitoring of VIX and FX implied volatility. The absence of a specific currency pair limits direct comparison.
How other firms see it
JPMorgan shares a similar view, noting that low volatility favors carry strategies, particularly in emerging markets. They expect this environment to persist through Q1.
Barclays is more cautious, arguing that the current calm is fragile and that a Middle East escalation could spike volatility quickly. They recommend hedging tail risks.
Goldman Sachs sees the low volatility as a reflection of market complacency. They expect a re-pricing as inflation data remains sticky, which could challenge carry trades.
Market Implications
Continued demand for high-beta FX (AUD, NOK) and EM carry currencies. Low volatility may compress option premiums, reducing hedging costs for speculators. However, any geopolitical escalation could trigger sharp reversals.
From the original
Despite the unresolved crisis in the Middle East and inflation spreading around the globe, FX markets remain very relaxed. Traded volatility levels are towards the lower end of five-year ranges. If currencies are not going anywhere, investors will continue to park funds in those
Related speeches
4 itemsFX Daily: Surprisingly low volatility keeps carry trade dominant
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.
Global FX: 2H Vol Outlook: Carry the Day, Vol the Tail
The desk anticipates a gradual increase in FX volatility during the second half of 2026, driven by depressed volatility levels and ongoing economic resilience. Per the full note from J.P. Morgan, though volatility has receded to post-COVID lows, the environment favors carry strategies due to attractive carry-to-vol ratios. As such, the emphasis is on strategies around the carry, particularly in low-yield pairs such as euro and Swiss yen. With no major economic catalysts expected imminently, traders should position themselves for a slow rise in volatility, leveraging favorable options setups.