- Barclays said foreign-exchange market instability may persist because of a stronger U.S. dollar and rising interest-rate volatility.
- Barclays said higher volatility in G10 currencies and broader foreign-exchange swings are likely to weigh on carry trades.
- Barclays said global carry trades offer limited investment appeal and warned of a possible repricing of emerging-market currencies, urging caution on chasing beaten-down high-yielding currencies.
Forecast Trend Report by Period
Barclays warned that turbulence in foreign-exchange markets may persist as the U.S. dollar strengthens and interest-rate volatility rises.
Bloomberg reported on October 27 that Barclays strategists Marek Raczko and Leonardo Cremonini wrote in a report that volatility in Group-of-10 currencies will increase and remain elevated.
Barclays said realized volatility in currency markets is currently below the implied volatility reflected in options prices. That gap will likely narrow as actual market swings pick up.
The bank said investor positioning for further dollar strength is already largely in place, creating the possibility that the greenback’s rally could pause temporarily. Even so, any respite in FX volatility would likely be brief.
Higher exchange-rate volatility is set to weigh on carry trades, which seek to profit from interest-rate differentials between countries. The strategy involves borrowing in low-yielding currencies and investing in assets denominated in higher-yielding ones. Sharp currency moves can erode returns generated by those rate gaps.
Carry trades posted strong returns after the U.S. announced broad tariffs in April last year, but performance has recently slowed. Barclays said risk-adjusted returns have declined for most carry-trade currencies since late August.
Barclays does not expect the rise in FX volatility to be temporary. The two strategists wrote that it is difficult to find enough appeal to justify taking an aggressive stance on global carry trades, while warning of a potential repricing in emerging-market currencies. They also advised investors to be cautious about chasing rebounds in high-yielding currencies that have already fallen sharply.
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