What Barclays sees
Barclays expects volatility across Group-of-10 currencies to pick up and stay elevated as the dollar strengthens and interest rates swing more. The bank also notes that actual day-to-day FX moves are still below the higher levels implied by options, and it anticipates that mismatch will shrink.
Carry trades under pressure
Barclays says elevated FX volatility creates an "unfavorable environment" for carry strategies that aim to harvest interest-rate differentials.
The warning and the quote
Positioning for a stronger dollar is already crowded, which could stall the rally, the strategists say, but "we would expect the probability of an increase in FX vol to drop only in the very near term." Looking ahead, Barclays expects any rise in currency volatility to stick and advises against buying carry currencies after sharp declines. They write, "We do not see value in chasing global carry trade," and caution that emerging-market currencies will likely reprice.
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Why it matters for your portfolio
More turbulence in major FX pairs can spill over into broader risk assets, especially strategies tied to interest-rate differentials. If volatility persists as Barclays expects, funding costs and hedging expenses can rise, and carry exposures may deliver thinner, bumpier returns.
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