The carry trade is back in fashion because oil got expensive again and investors decided they still like yield. That may sound like a Wall Street footnote, but it reaches South African businesses through very ordinary channels: fuel bills, import costs, loan pricing, and the value of the rand when invoices land.
A broad index that tracks the strategy has climbed more than 3% from its March low and about 1.7% since the Iran conflict began in late February. The setup is familiar. Traders borrow in low-yield currencies such as the yen, Swiss franc and Chinese yuan, then park the money in higher-yielding emerging-market currencies, including the Brazilian real and the South African rand.
Why the trade is working again
The recent lift started with the Middle East conflict and the jump in crude prices. At first, that pushed investors away from emerging markets and into safer assets. Over the past month, the mood has shifted back toward growth-sensitive markets, which tells you how quickly sentiment can turn when the market decides the oil shock may also keep rates elevated for longer.
Higher oil prices have also nudged traders to price in more aggressive tightening from central banks trying to stop consumer prices from running hotter. That keeps real rates attractive, meaning the nominal rate after inflation is still doing enough work to reward carry positions. Jason Devito, who manages emerging-market debt at Federated Hermes in Pittsburgh, says the trade is being supported by higher-for-longer real rates as inflation pressures build. He also argues that the market is getting better at separating the likely winners from the likely casualties.
His point is not subtle. Countries that can defend their policy credibility and still offer high real yields keep drawing money. Brazil is the obvious example. Countries that look more exposed to imported energy costs can still attract capital, but they have to work harder for it.
What the market numbers are saying
The pricing data backs that up. Bloomberg-compiled figures show that the average 12-month interest-rate swap across 14 emerging-market economies has moved up to 5.7% from 5% before the conflict began. That is a clean sign that traders now expect policy to stay tighter across the developing world than they did a few weeks ago.
Volatility matters just as much as yield in this game, and that piece has improved too. A JPMorgan Chase index that tracks one-month emerging-market foreign exchange volatility puts the current level at 6.88%, down from as high as 9.23% in the middle of March. Lower volatility makes carry trades easier to defend because exchange-rate swings are less likely to wipe out the interest-rate spread that investors came for in the first place.
Some individual positions have done very well. Borrowing in Swiss francs and buying Brazilian reais returned 6.6% since the end of February, according to Bloomberg data. Funding in yen and buying Turkish lira gained 6.9%. Those are the kinds of numbers that bring money back into a trade after a scare, even if the market still remembers how quickly it can go wrong.
Why South African businesses should care
For South African firms, the rand’s place in this trade is not abstract. A stronger rand can make imported goods and raw materials cheaper, which helps businesses that depend on overseas stock or equipment. Retailers, manufacturers and some online sellers can use that breathing room to protect margins or soften price increases.
The other side is less pleasant. If oil keeps climbing, transport, logistics, manufacturing and agriculture all feel it fast. Fuel is not a rounding error in South African operations. Once diesel and freight rise, the bill moves through the supply chain and shows up where consumers can see it, usually on the shelf label.
Higher rates add another layer. When markets expect central banks to stay tight, borrowing gets more expensive. That hits businesses trying to finance expansion, replace stock, or roll over debt. It also hits consumers who are already stretched, which is bad news for retail, hospitality and durable goods. If households spend more on debt service, they spend less on the discretionary stuff that keeps tills moving.
A stronger rand can help on the import side, but it can hurt exporters by making South African goods more expensive abroad. Mining and agriculture can benefit from high global commodity prices, yet they still have to manage local cost pressure and currency swings. In other words, the same macro backdrop can help one part of the balance sheet and damage another.
Which trades and countries still look attractive
Homin Lee, a strategist at Lombard Odier in Singapore, says he is bullish on the Brazilian real first. His view is that Brazil can absorb the energy disruption and still benefit from a post-conflict capex surge, which is a neat way of saying global money may keep chasing projects where the policy framework looks solid enough.
Anthony Kettle at RBC Bluebay Asset Management in London is less interested in broad EM enthusiasm and more interested in selectivity. He favours high-yielders with credible policy frameworks, strong real yields and solid external balances, and he points to the real as a preferred currency. He also likes frontier names that gain from higher energy prices, including Nigeria.
That caution matters because politics can easily interrupt the trade. Elections are due this year in both Colombia and Brazil, and markets hate uncertainty almost as much as they love yield. Add politics to oil, rates and volatility, and the trade gets crowded in a hurry.
Where the weak spots are showing
Not every carry position is holding up. Bank of America and Barclays have recently stepped away from bullish calls on the Turkish lira, largely because Turkey imports oil and the conflict has made that exposure more uncomfortable. That is the kind of decision that reminds investors the carry trade is never just about interest differentials. It is also a judgment on energy dependence, policy credibility and how much pain a currency can take before the yield no longer looks worth it.
For South African readers, the practical lesson is straightforward. When global oil rises and carry money flows back into higher-yielding currencies, local business conditions can shift quickly. Imports can get cheaper or more expensive, debt costs can move, and consumer spending can tighten without much warning. The rand sits inside that machinery, not outside it.