Carry trade gains momentum as market volatility eases By Investing.com

The key second-order effect is that a cleaner volatility backdrop mechanically extends the life of carry, but only so long as FX is being treated as a funding trade rather than a macro hedge. That matters because crowded carry books tend to look stable right up until a catalyst forces repatriation of funding currencies; in practice, the weakest link is usually the short-yen leg, not the high-yield basket. For banks with flow franchises, this is a favorable setup: elevated client demand for FX carry exposure and structured payoffs should translate into better derivatives activity even if spot moves are modest.

The real near-term winner is not just the commodity currencies themselves, but the brokers and market-makers facilitating option overlays and structured products. If investors are increasingly using digital options and other convex payoff structures, that implies richer implied vols on the wings even in an otherwise low-vol regime, which is a useful monetization channel for larger dealer franchises. The risk is that the same low-vol environment suppresses mark-to-market revenue in plain-vanilla flow businesses; the trade is more about mix shift than outright volume expansion.

The contrarian view is that this is a late-cycle extension trade disguised as a macro conviction. Carry gains of this magnitude early in the year often pull in fast money and systematic leverage, which can make the unwind sharper than the drawdown in the underlying currencies would suggest. Any reversal in oil, a spike in global rates volatility, or a shift in central-bank guidance that narrows rate differentials could break the strategy within days, even if the underlying EM macro story remains intact.

For the banks named, the actionable insight is that the earnings beta is likely to show up first in FX options and structured note desks, not in cash markets. That creates a better risk/reward in taking exposure to the infrastructure providers than to the currencies themselves, especially if the carry trade continues to attract retail-like participation through wealth channels and product wrappers.