SEB: FX Carry Trade - FJElite

The core view is that FX carry still has room to run through the rest of 2026. The main support comes from persistently high energy prices and elevated bond yields, with Iran seen as having little incentive to reach a deal before the US midterms. That keeps central bank divergence in place and continues to favour higher-yielding currencies. Europe has its own risks from winter energy prices and the French election, but some of those concerns may already be well understood by markets.

The main warning is positioning. Investors are increasingly leaning into the same carry theme, with an implicit long-dollar bias building through low hedge ratios and broader exposure to sustained rate differentials. At the same time, markets are already priced for sticky inflation, which means a meaningful drop in energy prices could create a sharp reversal in rates and FX.

The bigger regime shift is expected in 2027. If a US-Iran deal emerges after the midterms, lower energy prices could drive substantial disinflation and bring yields down. That would likely weaken the carry trade, reduce support for the dollar and favour Asian currencies, particularly if Japanese capital starts to return home and China maintains a stronger-currency policy. In that environment, lower-yielding cyclical currencies could outperform as the current carry setup unwinds.