BNY reported that its iFlow Carry index briefly moved into negative statistical significance for one session last week. The move reflected an inverse alignment between currency selling and corresponding 10-year bond yields where data were available.
Over the past week, nine of 15 high-yield currencies were net sold. The selling covered all regions and policy or fiscal settings.
Carry Trade Losing Momentum
BNY recorded only one currency as strongly sold: the Colombian peso (COP), with a flow magnitude above 1.0 for the week. The flows were described as trimming or light profit-taking after a period of carry resilience during sharp volatility and difficult balance-of-payments conditions.
Central banks currently meeting were described as signalling weaker demand and the prospect of rate cuts when conditions allow. The note also set out a risk that markets could shift focus towards growth support and lower nominal rates.
BNY said emerging markets account for most carry positions and warned that profit-taking on long positions could accelerate if expectations for a second-half policy shift build. It added that the iFlow Carry indicator has not shown an extended period of negative statistical significance this year.
BNY cited two such episodes last year, linked to “liberation day” tariffs in Q2 and AI-related valuations in Q4. It said those were the only similar phases since 2022–2023.
Risk Management For Carry Positions
We are seeing clear signs that the popular carry trade is running out of steam. Our iFlow Carry index recently flagged a strong inverse relationship, meaning investors were actively selling high-yield currencies to take profits. This is a significant shift after a long period of resilience, with nine of fifteen key currencies being sold off over the past week.
This light profit-taking appears to be spreading, and we must take it seriously. The JPMorgan Emerging Markets Currency Index, after a strong start to the year, has flattened out over the last month, reflecting this growing caution among investors. The Colombian Peso was a notable target of heavy selling, which could be a precursor for other high-yielders.
The fundamental driver for this change is that global central banks are beginning to pivot their language. They are now openly signaling concerns about weakening economic demand, with recent manufacturing PMI data from economies like Brazil and South Africa dipping below the 50-point contraction mark. This means interest rate cuts are now on the horizon for the second half of the year.
For our derivative positions, this calls for immediate risk management. It is time to consider buying put options on the most vulnerable high-yield currencies or on broad emerging market ETFs to hedge our existing long exposure. The increase in implied volatility will make options more expensive, but it is a necessary cost to protect against a rapid unwinding.
The primary risk is that the market will not wait for the central banks to act, and this profit-taking could accelerate very quickly. Even as futures markets show expectations for a Fed rate cut are being pushed back, a sell-off in emerging markets could happen independently as investors rush for the exit. We should prepare for this possibility by reducing leverage on carry trade positions.
Looking back, we saw similar, though brief, periods of this negative sentiment in the second and fourth quarters of last year, 2025. Those episodes, along with the bigger shift during the 2022-2023 tightening cycle, show how fast these themes can reverse. The current signals suggest we should act now before a small trim turns into a stampede.
