In a 2026 FX outlook, it’s anticipated that the low-volatility environment will persist into 2026, maintaining the popularity of carry trade strategies. Recent events raised questions about potential over-exposure in carry trades. This was evident as the Hungarian forint faced challenges due to budget news. However, the forint’s resilience indicates a continued commitment to carry trades in uncertain core markets.
Looser fiscal policy was expected, yet the Latam currencies continue to perform well, supported by high carry and metals. Market attention is on the US House potentially passing a bill to reopen government until 30 January, aiding the release of the September NFP jobs report. Also, New York Fed President John Williams is scheduled to give a keynote speech, though it’s not expected to alter the current expectation of a 66% chance of a 25bp Fed rate cut in December.
Dollar Index Forecast
The potential for the dollar to decrease further is unclear, suggesting the DXY index may remain within a 99.25-99.75 range. Analysts from FXStreet compile insights from various experts and provide additional analysis, covering market observations and forecasts.
We believe the current low-volatility environment is set to continue, which will keep carry trade strategies in favor. We see evidence of this in the Cboe Volatility Index (VIX), which has been trading in a subdued range around 14 for the past month, well below its historical average. This suggests traders should continue to explore borrowing in low-interest rate currencies to invest in those with higher yields.
For now, we expect the US Dollar Index (DXY) will likely remain within a tight 99.25-99.75 range. While we are watching New York Fed President John Williams’ speech today, it is unlikely to alter the market’s current pricing of a 66% probability for a 25-basis-point Fed cut in December. This outlook makes selling options, such as writing calls at the top of the range and puts near the bottom, an attractive strategy to collect premium.
A key risk to this stability is the potential release of the September non-farm payrolls report next week, which could happen if the US government reopens by Friday. Given that the last two jobs reports in 2025 have missed consensus forecasts, another weak number could pressure the dollar. Traders should be prepared for a short-term spike in volatility around that release and consider using options to hedge their positions.
Performance of Latin American Currencies
We also note that Latin American currencies are showing strong performance, driven by high interest rates and a positive story for metals. With Mexico’s central bank rate holding at 11.00% and Brazil’s at 12.50%, the appeal of the carry trade is clear when compared to near-zero rates elsewhere. This trend is bolstered by copper prices, which have remained firm above $4.00 per pound, supporting the region’s commodity-linked currencies.
It is wise to remember similar low-volatility periods, like the one we experienced back in 2017, which also saw carry trades become extremely crowded. That calm ended with a sudden surge in volatility in early 2018 that caught many off guard. This historical precedent reminds us to remain vigilant about risk, even when the market appears stable.
