Oil Surge Fuels 6% Return for Forex Carry Trades

Edgen Stock·Mar 17 2026, 16:10

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Key Takeaways

Elevated oil prices, driven by geopolitical conflict, are powering one of the few profitable strategies in a turbulent market: the forex carry trade. Traders are borrowing low-interest rate currencies like the Japanese yen to invest in the high-yielding currencies of commodity-exporting nations, capturing significant returns while other asset classes like stocks and bonds falter.

Exceptional Performance: Certain forex carry trade strategies have delivered returns exceeding 6% year-to-date, marking the strongest start to a year since 2023.
Commodity Driver: Escalating Middle East tensions have pushed Brent crude oil prices above $103 per barrel, directly benefiting the currencies of oil producers like Brazil.
Concentrated Risk: While profitable, the strategy is vulnerable to a sudden shift in sentiment. A flight to safety could cause a sharp appreciation in the Japanese yen, rapidly erasing gains for traders.

Carry Trades Deliver Over 6% Gain in Volatile Market

While global assets face pressure from geopolitical tensions, a classic foreign exchange strategy is delivering standout performance. Certain carry trades have generated returns of more than 6% this year, their strongest start since 2023, providing a rare bright spot as U.S. Treasuries erase their annual gains and equities slide.

The core strategy involves borrowing in a low-interest-rate currency to invest in a higher-yielding one, profiting from the interest rate differential. One popular execution involves funding trades with the Japanese yen to buy a basket of currencies including the Brazilian real, Colombian peso, and Turkish lira. This specific combination has returned over 2% since the Middle East conflict began.

Oil Prices Above $103 Boost Commodity Currencies

The trade's recent success is directly tied to soaring energy prices. With global benchmark Brent crude climbing 2.67% to settle at $103.14 per barrel and U.S. West Texas Intermediate rising to $98.71, currencies of oil-exporting nations have strengthened significantly.

The main reason for the solid performance of FX carry trades is commodities. Some high-carry currencies benefit from rising oil and gas prices.

— Leah Traub, Head of Currency Team at Lord Abbett & Co.

Brazil has become a focal point for this strategy. The country's benchmark interest rate stands at an attractive 15%, and its position as a major oil producer distant from the conflict zone makes its currency, the real, a prime target for investors. Strategists at Macquarie Group note that going long on the currencies of oil producers far from the conflict is particularly advantageous in the current environment.

Citigroup Exits as Unwinding Risks Grow

Despite the strong returns, the strategy carries significant risk. Analysts warn that an escalation of the conflict could trigger a global flight to safety, causing investors to rapidly buy back the Japanese yen to close their positions. Such a move would cause the yen to appreciate sharply, potentially wiping out all profits from the carry trade.

Reflecting this concern, strategists at Citigroup closed their last recommended emerging-market carry trade positions last week, citing the high level of uncertainty and volatility. The trade's vulnerability is also evident in trades funded with the U.S. dollar, which have already incurred losses this month as the dollar strengthened against most emerging market currencies.