Carry trade, commodities make EM currencies more stable than G7

Published Sun, Feb 15, 2026 · 10:22 PM

EMERGING market currencies are proving more stable than those in developed nations, a streak some investors say could become the longest in more than two decades.

JPMorgan volatility indices show developing nations’ currencies have swung less than their Group of Seven peers for nearly 200 straight days – the longest stretch since 2008. If it passes 208 days, it would mark a record going back to 2000.

The unusual calm in the cohort usually regarded as riskier is being driven by a mix of factors. A weaker US dollar and expectations for gradual Federal Reserve easing have reduced pressure on developing markets.

Meanwhile, strong commodity prices and robust capital inflows have supported demand for emerging market (EM) assets. That backdrop is reinforcing the appeal of the carry trade, said JPMorgan Asset Management.  

“EM currencies remain a carry trade, hence the controlled volatility environment will continue to attract ongoing inflows into EM local assets,” said Jason Pang, a fixed income portfolio manager at the money manager in Hong Kong.

The carry-trade strategy – borrowing in low-yielding currencies to invest in higher-yielding emerging-market assets – thrives in calm conditions and can help stabilise currencies by sustaining inflows.

Investors have poured money into emerging markets this year at the fastest pace for the period since 2019, indicated a Bloomberg capital flow proxy gauge, extending last year’s surge, which was the largest since 2009.

The inflows are supporting performance. A Bloomberg index of eight developing market currencies has risen about 2.8 per cent so far this year, extending last year’s stellar 17.5 per cent advance.

Structural factors are also helping to keep market swings contained.

Improvements in emerging market fundamentals, relatively stronger growth than in developed economies and ample foreign exchange reserves should help keep emerging market currency volatility subdued this year, said Matthew Ryan, head of market strategy at Ebury Partners.

In contrast, developed market currencies have faced turbulence. Broad US dollar implied volatility rose earlier this year after US President Donald Trump threatened tariffs on Europe as part of his push to acquire Greenland, alongside uncertainty over the Fed chair announcement.

Yen volatility has also climbed amid concerns about Japan’s fiscal outlook and possible intervention by authorities. It could face further pressure if the yen carry trade unwinds, a risk that has been referred to as a “ticking time bomb”.

Concerns over US exceptionalism and the country’s fiscal path have also prompted some investors to look beyond the greenback. 

“Investors are looking at less volatile currencies in the emerging market space, such as the Singapore dollar, the baht and the yuan in Asia,” said Daniel Tan, a portfolio manager at Grasshopper Asset Management. “This trend of low volatility for EMFX can continue until we see the next tail risk event.” BLOOMBERG