BNY’s Geoff Yu highlights that iFlow Carry has turned negatively significant for the first time in 2026, signalling ongoing unwinding of carry trades but also a potential contrarian opportunity. He argues that improved risk appetite, helped by a Gulf ceasefire and a limited Fed hawkish pivot, could support a strong recovery in FX carry as liquidation completes.

Carry unwinds hint at rebound

"Our iFlow Carry index has moved into negative statistical significance for the first time in 2026. The index is the daily Spearman rank correlation between 32 currency flow indicators and their corresponding local bond yields. This index gauges the strength of flows’ alignment with their corresponding bond yields."

"Current flows indicate that currency flow performance is increasingly negatively aligned with those currencies’ bond yields, i.e. carry trades are unwinding. While this may continue in the near term, we see the alignment as a contrarian signal, indicating that carry trades stand to recover strongly as liquidation runs its course. Recovery in iFlow Carry is also consistent with the improved risk environment given the ceasefire in the Gulf and a limited hawkish pivot from the Fed for now."

"To identify the most attractive currencies in line for mean reversion, we look for those with the biggest potential moves in rankings if carry interest turns strongly positive. BRL longs offer a strong risk-reward profile according to this criterion. The currency is only moderately overheld but has been, by far, the most-sold carry currency over the past month."

"All other high-yielding currencies also remain net long, but flow scores are more subdued. CHF is a similar story case for funders: over the past month it has been well-bought, while its holdings score is now comfortably positive. This is a very rare state of affairs for a currency with zero rates, and – unlike JPY – it is not considered excessively undervalued."

"Already, we are seeing a shift toward improved risk appetite outside of equity markets, and we are particularly attentive to potential gains in FX carry trades as real yields recover. The bigger question is how to reconcile U.S. exceptionalism with improved risk-reward elsewhere, and that is where idiosyncratic factors will matter greatly."

(This article was created with the help of an Artificial Intelligence tool and reviewed by an editor.)