Global Banks See Carry Trade Gains Extending Into 2026, With Türkiye Among Top Picks
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Summary:
Major global banks including Morgan Stanley, Bank of America and Citigroup expect carry trade strategies in emerging markets to continue delivering solid returns in 2026, supported by high real interest rates and a weaker U.S. dollar. Türkiye has emerged as one of the currencies most frequently recommended by strategists, alongside Brazil and the Czech Republic.
Carry Trades Off to a Strong Start in 2026
Carry trade strategies—borrowing in low-yielding currencies and investing in higher-yielding emerging market assets—have begun 2026 on a strong footing, according to Bloomberg data and major investment banks.
Bloomberg’s carry trade index tracking eight emerging market currencies shows gains of 1.3% since the start of the year, as investors continue to sell the dollar and rotate into high-interest-rate currencies.
The positive momentum follows an exceptionally strong 2025, when carry trades delivered returns of around 18%, the highest annual performance since 2009.
Dollar Weakness Supports Emerging Market Currencies
Strategists say continued pressure on the U.S. dollar—linked to policy uncertainty under U.S. President Donald Trump—has reinforced interest in emerging market carry trades.
Beyond currency performance, high real interest rates remain the core driver of the strategy. Despite easing inflation trends, many emerging market central banks are maintaining tight or cautiously easing monetary policies, providing investors with attractive yield differentials.
Morgan Stanley Highlights TL Among Preferred Currencies
Morgan Stanley’s Head of Emerging Markets Strategy James Lord said the bank is focusing on countries with tight monetary policy frameworks and strong central bank credibility.
For 2026, Morgan Stanley’s preferred carry trade currencies include the Brazilian real, the Turkish lira, and the Czech koruna, placing Türkiye firmly on the recommended list for yield-seeking investors.
Latin American currencies have been among the strongest performers. The Brazilian real delivered 23.5% returns in 2025 and is up 4.5% so far in 2026, supported by a policy rate of 15%, even as inflation trends closer to target.
Citi Also Recommends Turkish Lira
Citigroup strategists echoed a similar view, recommending long positions in the Brazilian real against the dollar and identifying the Turkish lira as one of the most attractive currencies for carry trade strategies.
By contrast, weaker-performing currencies such as the Indian rupee, which was among last year’s laggards, have continued to underperform in 2026, generating losses of around 2% in carry trade terms. The Indonesian rupiah has also posted negative returns.
Mexico Peso Performs Well
The Mexican peso has also delivered solid gains, with carry trades generating around 4.3% returns in 2026 to date. Deutsche Bank has maintained a positive outlook on the peso, citing supportive monetary policy and resilient capital inflows.
Record Performance and Conditions Ahead
According to Bloomberg data, the strongest year on record for carry trades was 2003, when returns reached 25%.
Analysts say repeating such performance would require the dollar to remain under pressure and volatility in emerging market currencies to stay contained.
Volatility and Geopolitics Remain Key Risks
Investors are closely monitoring market volatility, with the JPMorgan volatility index recently rising to its highest level in three weeks after an extended period of calm.
Bank of America strategist Alex Cohen said carry trades are likely to remain attractive as long as volatility stays low, but warned that geopolitical risks remain the most significant threat to the strategy’s sustainability.
