The Carry Trade Reversal: How EM Traders Are Ditching the Dollar for the Euro, Franc, and Yen

The old dollar-funded carry trade is largely inverted. Traders now short EUR, CHF, and JPY and go long high-yielding EM currencies, profiting from the interest-rate differential while sidestepping USD borrowing costs .

Commodity-Exporting Currencies That Are Outperforming

The carry trade bounced back strongly in 2026, driven by surging crude oil and commodity prices. Elevated commodity prices bolster the currencies of exporters by keeping their interest rates high and their terms of trade strong .

The top-performing target currencies are:

• Brazilian real (BRL): A favorite high-yield target. Brazil's high benchmark rate offers a large carry differential, and the currency benefits from strong commodity exports .
• South African rand (ZAR): A core commodity-currency pick, benefiting from elevated commodity prices and attractive yields .
• Colombian peso (COP) and Mexican peso (MXN): Also cited as favored EM carry currencies, supported by commodity exports and relatively high interest rates . LatAm currencies are now significantly outperforming the rest of emerging markets in both FX and fixed income .

The numbers back this up. An index tracking the EM carry trade jumped more than 3% from its March 2026 low, and JPMorgan volatility indexes show EM currencies have been more stable than G7 peers for nearly 200 straight days — a streak that supports continued carry returns .

Why the Chinese Yuan Is the Biggest Risk to the Strategy

The Chinese yuan (CNY/CNH) is a structural wild card that could disrupt the entire EM carry trade. It is too large and too policy-driven to ignore.

• Tight PBOC control kills the carry. The People's Bank of China paces the yuan's appreciation deliberately to shield exporters. That measured pace "neutralize[s] any benefits from holding higher-yielding dollars" and curbs speculative carry inflows . Traders cannot reliably short the yuan for carry, removing a large, liquid EM currency from the opportunity set.
• Undervaluation creates distortion. A July 2025 IMF assessment found the renminbi undervalued by 8.5% . Goldman Sachs puts the figure at 25% undervalued in its 2026 outlook . A sudden sharper appreciation — whether from political pressure or a policy shift — could trigger a re-rating of the entire Asian FX complex, compressing carry returns across the region.
• China's more ambitious push for internationalization. Beijing dropped the word "carefully" from its 2026–2030 yuan internationalization plan, signaling a more aggressive push to boost the yuan's global footprint . Faster yuan internationalization could create new funding or hedging avenues that reshape traditional carry pairings, or it could introduce more volatility if China opens its capital account further.
• Contagion risk. If the yuan depreciates unexpectedly (to boost exports amid tariff pressure), it could drag down other Asian EM currencies, wiping out carry positions across the region. RBC notes that the yuan's role as the anchor currency for Asia means its appreciation sets the stage for the whole region . The direction of the yuan plays a dominant role in the valuation of many EM currencies.

The bottom line: any EM carry strategy must account for PBOC actions. A sudden depreciation to defend exports, or a faster appreciation under internationalization pressure, could suddenly shift the entire EM currency landscape.