According to insights, Goldman Sachs Group states that within the global $9.5 trillion daily turnover foreign exchange market, the carry trade—one of the most widely employed trading strategies—is encountering its most appealing market conditions since 2000.
Goldman Sachs strategist Stuart Jenkins wrote in a report that the significance of long carry trades in the G10 foreign exchange market has reached nearly its highest level since 2000.
He indicated that Goldman Sachs currently favors using the Japanese yen, Swiss franc, or euro as funding currencies for carry trades over the coming months. This involves borrowing currencies with lower yields to invest in those with higher yields.
A combination of factors has significantly boosted the attractiveness of carry trades. Goldman Sachs notes that interest rates in major developed economies have stabilized at elevated levels with substantial differentials between them, creating exceptionally wide yield spreads for investors.
Concurrently, foreign exchange market volatility has dropped to historically low levels. An index from JPMorgan shows FX volatility is currently hovering near its lowest point since 2020.
Driven by this environment, G10 foreign exchange carry trades have delivered a return of approximately 8% so far this year. This performance outpaces global bonds, gold, and Bitcoin, though it still lags behind the equity market.
In the report released Thursday, Jenkins wrote, "It is the stabilization of G10 rates in their current ranges—which has reduced realized volatility from rate differentials and implies a relatively limited expected path of policy action ahead—that has allowed G10 FX carry yields to rise while volatility has remained subdued."
Hedge funds and asset managers typically utilize carry trades to profit from interest rate differentials between markets. This strategy remains profitable as long as exchange rates remain broadly stable.
However, the strategy carries inherent risks. While carry returns accumulate gradually, losses from exchange rate moves can materialize rapidly within minutes. Therefore, a sudden surge in market volatility could trigger swift unwinding of carry positions and amplify fluctuations across financial markets.
Barclays warned this week that the current calm in currency markets is inconsistent with the reality of high economic uncertainty globally. The bank stated that its models suggest FX volatility is more likely to increase than decrease further from current levels.
Currently, the yield on the 2-year U.S. Treasury remains above 4%. In contrast, the yield on comparable German bonds is around 2.6%, Japan's is approximately 1.4%, and Switzerland's is only about 0.1%. This creates one of the most significant interest rate differentials among developed economies in recent years.
Goldman Sachs asserts that, from a long-term perspective, the Japanese yen remains the most ideal funding currency for carry trades. The yen remains near its weakest level against the U.S. dollar in nearly four decades.
While Japanese authorities could intervene in the currency market at any time, Goldman Sachs expects the yen to continue weakening unless the macroeconomic environment shifts.
Goldman Sachs also sees an investment opportunity in being long the U.S. dollar against the Swedish krona. Markets Live strategists similarly noted that long USD/SEK positions currently offer a very substantial carry.
Furthermore, under a so-called "risk-neutral" scenario, Goldman Sachs recommends buying the euro against the Swiss franc, as this currency pair offers one of the highest "carry-to-volatility" ratios among major currency combinations.
Additionally, Goldman Sachs is positive on being long the Australian dollar against the New Zealand dollar.
Jenkins stated, "We believe that harvesting carry in G10 FX, while offering relatively effective insulation from risk-asset drawdowns and even providing some hedging properties, represents an attractive allocation for multi-asset portfolios."
Comments