EM FX carry trades have stayed resilient despite the Middle East conflict. Among 12 high-yielding EM currencies with enough data, only INR and RON are now classed as underheld. Real rates are presented as the main support for carry performance. Inflation is expected to rise globally, while many EM central banks are expected to avoid aggressive easing during a supply shock due to recent policy credibility. Another factor is possible resistance from the Federal Reserve on rate cuts. Bank Indonesia’s Tuesday decision is cited, with IDR described as most at risk of joining INR and RON in underheld territory. Bank Indonesia framed its decision around “strengthening external resilience”. It referred to exchange-rate stabilisation via intervention and attracting foreign portfolio investment as policy anchors. Most EM central banks are expected to take a similar approach, and most high-yielding currencies remain net bought. TRY is facing the strongest selling pressure despite very high nominal rates, linked to fiscal concerns and the cost of subsidies if the conflict continues. The piece also notes limited market tolerance for large-scale energy price intervention. It links this to austerity or rationing measures across emerging and frontier economies. The resilience in Emerging Market FX carry trades is something we should continue to trust for now. The key factor is the strong real interest rates offered by these economies. While global inflation is ticking up, with the latest US CPI coming in at 3.4%, most EM central banks have built enough credibility to hold rates high. This situation is reinforced by the Federal Reserve’s reluctance to cut rates, with markets now pricing the first cut for September 2026 at the earliest. We saw this pressure play out last year in 2025, where EM currencies only stabilized after it became clear the Fed was on a prolonged pause. This forces EM central banks to maintain high rates to prevent capital from flowing out and weakening their currencies. Therefore, most high-yielding currencies remain a net buy, with the Mexican Peso being a prime example, offering a real rate over 6% with its policy rate at 11.00%. However, we should be cautious with the Indian Rupee and Romanian Leu, which are already seeing net outflows. The Indonesian Rupiah is also showing weakness, as its trade surplus narrowed to just $0.87 billion in January 2026, making it vulnerable to joining the underheld group. The Turkish Lira is the one to actively bet against, despite its very high nominal interest rates. The recent government decision to expand energy subsidies, which could widen the budget deficit by another 1.5% of GDP, is spooking the market. This signals that fiscal worries are overriding monetary policy, making further depreciation likely. For derivative plays, this suggests selling TRY call options or buying forward points to short the currency. At the same time, we can maintain long positions in currencies like the Mexican Peso or Brazilian Real against lower-yielding funding currencies. We remember the sharp EM sell-off in Q3 2025, so using options to define risk on these long carry positions remains a prudent strategy.

Start trading now – Click here to create your real VT Markets account