In quiet FX markets, the coupon becomes the story.
Takeaways
• G10 FX carry is becoming relevant again as high rate dispersion meets unusually quiet volatility.
• The trade is no longer just a simple risk-on bet, with some carry expressions now looking more neutral or even defensive.
• JPY and CHF remain the cleanest funding legs, though both come with their own tripwires.
• EM still offers more yield, but G10 carry now looks much more useful for portfolios that want income without taking the full EM risk bucket.
Carry Is Back in the Driver’s Seat
For the record, I think every FX trader should have a carry trade on the books in this kind of market. When rate dispersion is wide, volatility is quiet, and forward points are paying you to wait, carry matters. But there is a difference between harvesting carry and picking up nickels in front of an intervention train.
G10 FX carry is back, and this time it is not just the dusty old yield trade being wheeled out because investors have run out of ideas. The set-up is unusually practical. Policy rates remain elevated, rate dispersion across G10 central banks is still meaningful, and FX volatility has stayed remarkably contained despite higher front-end yields, geopolitical noise, and a macro backdrop that hardly looks risk-free.
That is exactly the sort of market where carry stops being a footnote and starts shaping the return profile. You do not need a heroic spot move when the forward points are already doing some of the heavy lifting. In quiet FX markets, the coupon becomes the trade. And with spot volatility subdued, carry has been able to explain a much larger share of returns across G10 than it could in the years when every central bank was pinned near zero and every FX move was really just a dollar liquidity story in disguise.
The important point is that spot has not consistently worked against the carry. In several places, the currency move and the yield advantage have been pulling in the same direction. Yield-seeking flows have found their way back into FX, while some higher-yielding currencies have also benefited from better external balances, commodity support, or simply the absence of a domestic shock big enough to scare investors out of the trade. That makes this more than a carry coupon grinding away in the dark. In parts of the market, carry and spot have been singing from the same hymn sheet.
The reason the trade works better now is straightforward. The post-Covid inflation cycle left behind higher and more varied policy rates, but the central-bank impulse has become less explosive. Markets are no longer repricing every policy meeting as if someone just rolled a live grenade across the dealing desk. That stabilisation matters. Carry only really works when the rate gap is large enough to pay you, but steady enough not to blow up the position. That is why carry-to-vol in parts of G10 now looks unusually rich, with crosses such as and standing out on that score.
The more interesting wrinkle is that carry has become less chained to the old risk-on rulebook. In the classic version, you clipped the coupon when equities behaved, then gave it all back the moment risk appetite hit an air pocket. Carry was often just equity beta wearing a yield costume. But that relationship has weakened. Some of the better carry-to-vol opportunities are now showing up in crosses that have traded closer to risk-neutral in recent months, while some long-Dollar expressions can even sit nearer the defensive side of the ledger.
That changes the portfolio maths. Earning carry while taking less direct exposure to equity drawdowns is far more useful than the old carry trade that looked wonderful until the first volatility spike turned the coupon into confetti. There is no free lunch in FX, only better-disguised invoices, but this is still a cleaner version of the trade than investors had through much of the post-GFC period, when G10 rate dispersion was thin and volatility had an annoying habit of eating whatever carry was available.
EM FX still offers the fuller yield plate, but the gap versus G10 is not as compelling as it normally is. That matters. Developed-market carry comes with deeper liquidity, fewer convertibility headaches, and less event-risk baggage. For investors who want income without loading the boat with emerging-market risk, G10 carry has moved from an afterthought to a real portfolio tool.
The funding side is still where the landmines sit. The yen remains the obvious low-yield funder, but intervention risk is parked across the road like a tripwire. Higher-for-longer US yields, low recession risk, and Japan’s fiscal worries can keep the yen vulnerable over longer horizons. But tactically, the rule still holds: do not pick nickels in front of the intervention train.
The franc is the cleaner low-yield funder. CHF remains one of the lowest-yielding currencies in G10, keeping EUR/CHF and attractive carry expressions. The SNB does not look like a major obstacle for now, but a renewed gold rally would complicate the short-franc story through Switzerland’s terms-of-trade channel. That is the kind of slow-burn risk that does not matter until suddenly everyone remembers it at the same time.
So the message is not that G10 carry is riskless. It never is. The message is that it matters again. Rate dispersion is paying investors, low volatility is allowing the payment to survive, and the carry book no longer has to live entirely inside the risk-on casino.
FX is returning to one of its oldest functions: getting paid for the price of money across borders. When central banks stop moving in lockstep, when volatility stays quiet enough not to eat the coupon, and when low-yield funders still have structural reasons to stay heavy, carry is no longer the side dish. It is back on the main plate.
For me, I don’t always abide by the carry theory. Anyone who has been reading my blog knows I was happy to pay a small amount of negative carry to run short from the mid to high-1.22s, and I closed that position this week after hitting my 200-pip target.
That is the point. Carry matters, but it is not a religion. Sometimes the best trade is to earn the carry. Sometimes the best trade is to pay a little carry because the spot set-up is simply better. The trick is knowing when the coupon is your friend and when it is just the market charging you rent while you wait for the real move.
