Emerging Market Carry Trade Rebounds With Real, Rand Leading
12h ago|4 min read1Standard
Fazen Markets Editorial Desk
Collective editorial team · methodology
Fazen Markets Editorial Desk
Collective editorial team · methodology
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An emerging-market carry trade index has rebounded from losses triggered by Middle East tensions in mid-April, gaining 1.1% in May 2026 through the 17th. The recovery erases the 1.4% decline sustained after Iran-Israel hostilities escalated and is led by the Brazilian real and South African rand. Surging crude oil prices are reinforcing expectations that interest rates will remain elevated, bolstering the currencies of major commodity exporters. This data was reported by Bloomberg on May 17, 2026.
The carry trade strategy, which involves borrowing in a low-yielding currency to invest in a higher-yielding one, is highly sensitive to global risk appetite. The last significant disruption to this strategy occurred during the 2022-2023 Fed hiking cycle, when the JP Morgan EM Carry Index fell over 15%. The current macro backdrop features a strong US dollar, with the DXY index near 105.5, and persistent inflation concerns keeping developed market rates high.
What changed the trajectory was a sharp rally in Brent crude futures, which broke above $90 per barrel. This price surge was triggered by renewed geopolitical supply risks and stronger-than-anticipated demand signals. Higher energy prices directly benefit the fiscal and trade balances of net commodity exporters like Brazil and South Africa, making their high-interest-rate environments more sustainable and attractive to yield-seeking capital.
The JP Morgan EM Carry Trade Index has advanced 1.1% month-to-date as of May 17, 2026. This recovery fully offsets the 1.4% loss recorded between April 12 and April 20. The Brazilian real has appreciated 2.8% against the US dollar in May, while the South African rand has gained 2.1%.
Brazil’s benchmark Selic rate stands at 10.50%, and South Africa’s repo rate is 8.25%. This creates a significant yield advantage over the US Federal Funds rate of 5.50%. The MSCI Emerging Markets Currency Index is up 0.7% for the month, underperforming the specific carry trade basket which is more heavily weighted toward high-yielders.
| Currency | May Gain vs USD | Central Bank Rate |
|---|---|---|
| BRL | +2.8% | 10.50% |
| ZAR | +2.1% | 8.25% |
| MXN | +0.9% | 7.50% |
The resurgence favors emerging market local currency debt ETFs like the iShares J.P. Morgan EM Local Currency Bond ETF (LEMB) and VanEck J.P. Morgan EM Local Currency Bond ETF (EMLC). Brazilian equity ETFs such as the iShares MSCI Brazil ETF (EWZ) also benefit from currency strength reducing dollar-denominated debt burdens. Conversely, companies in developed markets that rely on imported commodities, particularly in Europe and Japan, face margin pressure from stronger EM currencies and elevated raw material costs.
A key risk to the trade is its dependence on stable or weakening US dollar momentum. A sudden hawkish pivot from the Federal Reserve could swiftly reverse these capital flows and trigger unwinding. Current positioning data from futures markets indicates that leveraged funds have been building net long positions in both the real and the rand throughout early May, signaling a return of speculative interest.
Traders will monitor the Federal Reserve’s FOMC meeting minutes release on May 22nd for any clues on the path of US rates. The next OPEC+ meeting on June 1st will be critical for maintaining oil price support for commodity currencies. Key technical levels to watch include USD/BRS testing support at 5.20 and USD/ZAR holding below 18.50.
Brazil’s central bank will announce its next rate decision on June 19th, with current swaps pricing indicating a high probability of rates being held steady. A break above $95 per barrel for Brent crude would further reinforce the fundamental backdrop for energy-linked emerging market units, while a drop below $87 could remove a primary support pillar.
An emerging market carry trade is an investment strategy where traders borrow funds in a currency with a low interest rate, like the Japanese yen or Swiss franc, and use the proceeds to buy financial assets in a higher-yielding emerging market currency. The profit comes from the interest rate differential, known as the carry, provided the exchange rate remains stable or appreciates.
Brazil is a major exporter of crude oil and agricultural commodities, while South Africa exports precious metals and minerals. Higher oil and commodity prices improve these nations' terms of trade, boosting their current account balances and government tax revenues. This fiscal improvement allows their central banks to maintain higher interest rates for longer, which attracts foreign capital and strengthens their currencies.
The primary risk is currency volatility. If the high-yielding currency depreciates significantly against the funding currency, the losses on the exchange rate can quickly erase the profits gained from the interest rate differential. This often occurs during periods of rising global risk aversion or when the US dollar strengthens abruptly due to safe-haven flows or Fed policy tightening.
The EM carry trade's rebound is a direct function of commodity-driven rate expectations overpowering earlier geopolitical risk premiums.
Disclaimer: This article is for informational purposes only and does not constitute investment advice. CFD trading carries high risk of capital loss.
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