In the 2026 FX outlook, we expect the low-volatility environment to continue, enhancing the popularity of carry trade strategies. Recent events have raised concerns about potential risks in carry trades, particularly as the Hungarian forint struggled due to budget news. However, the forint’s strength suggests a strong interest in carry trades amid uncertainty in core markets. While looser fiscal policies were anticipated, Latam currencies are performing well, thanks to high carry rates and strong metals. The focus is on the US House potentially passing a bill to keep the government open until January 30, which would help release the September Non-Farm Payroll (NFP) jobs report. New York Fed President John Williams is also set to give a keynote speech, but it’s unlikely to change the current expectation of a 66% chance of a 25-basis-point rate cut from the Fed in December.

Dollar Index Forecast

It’s unclear whether the dollar will decline further, indicating that the DXY index may stay within a 99.25-99.75 range. Analysts from FXStreet gather insights from various experts, providing additional analysis on market trends and forecasts. We believe the current low-volatility environment will persist, keeping carry trade strategies popular. This is evident from the Cboe Volatility Index (VIX), which has been trading around 14 for the past month, far below its historical average. This trend suggests that traders should consider borrowing in low-interest rate currencies to invest in those with higher yields. For now, we expect the US Dollar Index (DXY) to stay in a tight 99.25-99.75 range. While we monitor New York Fed President John Williams’ speech today, it is unlikely to change the market’s current pricing of a 66% chance for a 25-basis-point Fed cut in December. This situation makes selling options, like writing calls at the top of the range and puts near the bottom, a smart strategy to earn premiums. A significant risk to this stability is the upcoming release of the September non-farm payrolls report, which could occur if the US government reopens by Friday. Since the last two jobs reports in 2025 missed expectations, another disappointing number could put pressure on the dollar. Traders should be ready for a short-term spike in volatility around this report and consider options to protect their positions.

Performance of Latin American Currencies

Latin American currencies are showing strong performance, driven by high interest rates and a positive outlook for metals. With Mexico’s central bank rate at 11.00% and Brazil’s at 12.50%, the appeal of carry trade strategies is clear compared to near-zero rates in other regions. This trend is further supported by copper prices, which have remained firm above $4.00 per pound, strengthening the region’s commodity-linked currencies. It’s important to recall similar low-volatility periods, like in 2017, when carry trades became very popular. That calm was disrupted by a sudden surge in volatility in early 2018 that caught many by surprise. This historical example serves as a reminder to stay cautious about risk, even when the market feels stable. Create your live VT Markets account and start trading now.

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