Equilon FXThis article preserves the desk’s published view at that time. Prices, market assumptions and trade status are historical statements, not current guidance or independently verified performance.
All of last year, carry trades got hammered. Volatility was high, funding was expensive, and every time the trade started working it got smashed by a risk-off event. Three weeks into 2026, carry is back, and it's running.
What changed
Three things, in order of importance:
- Implied volatility on G10 majors has compressed to the lowest level in 14 months. When vol is low, carry-collection trades can run for weeks before getting interrupted.
- Risk appetite has firmed. The risk-off events that wrecked carry in 2025 (banking stress, geopolitics) have stabilized. Equities are at highs, credit spreads tight.
- Rate differentials are wide and stable. The Fed has been on script. The BoJ has been patient. The ECB has stopped flirting with cuts. The whole point of carry is that it pays when the differentials don't move much — and they're not moving.
The trades that are working
Long USD/JPY: pays roughly 5% per year in carry, has run from 148 to 153 in three weeks. The headline trade.
Long USD/MXN (when we trade it): high-yielder against soft funder.
Long AUD/JPY: cleaner technical structure than USD/JPY, similar carry, less crowded.
Why we're not piling in
The desk is conservative on carry trades by structure. Reasons:
- Carry trades work until they don't, and when they don't they collapse fast. A six-month +15% trade can give back half in 48 hours on a risk-off event. The loss profile is asymmetric the wrong way.
- The trades that pay carry are obvious to everyone. By the time it's the dominant theme, positioning is crowded. Crowded long carry is exactly the setup for the next risk-off event to clear out.
- Our edge isn't carry collection. Our edge is technical setups with structural invalidation. Switching playbooks because the regime has changed is the fastest way to lose your edge.
What we are doing
We're taking the technical setups that benefit from the carry-friendly regime — long EUR/CHF (separate macro thesis), patient longs on AUD/USD, and the EUR/USD range fade — without explicitly committing to carry as a strategy.
What we're watching for
The regime shift back. The signals: a clean spike in volatility above the 90-day average, equities breaking trend, credit spreads widening 50bp+. Any one of those and the carry-friendly window slams shut.
We're not betting against the current regime. We're staying ready for the day it changes.
Educational only. Not investment advice. Read the full risk disclaimer.