Newsletter · 2026-09-29 · Ashutosh Agarwal

The Dollar Breaks Higher as EM Carry Trades Take a Breather - EM FX Weekly - Week of September 29, 2026

EM FX Weekly for the week of September 29, 2026: J.P. Morgan's FX team said the dollar is finally breaking higher while carry takes a breather, MUFG laid out how a carry liquidation would hit the Mexican and Chilean pesos, the SARB hiked to 7.25% and the rand still fell, the US diesel export ban stayed undecided, Brazil drew a rate-cut bull case, and Korea and Indonesia kept hiking.

EM FX Weekly

Week of September 29, 2026: The Dollar Breaks Higher as EM Carry Trades Take a Breather

For most of 2026, betting on emerging-market currencies has been one of the easiest trades going. You borrowed cheaply in dollars (or yen), bought currencies that paid high interest, and got paid to wait. Last week we flagged that the global bond selloff had finally reached EM. This week the other shoe dropped. The dollar itself started to climb.

J.P. Morgan's currency team opened its weekly podcast with a line that sums it up: "the dollar's finally breaking higher." They don't think the carry trade is dead. They think it's taking a nap while the dollar has its turn. The bigger question now is whether that nap turns into a rush for the exits. MUFG is openly asking that on its podcast.

Meanwhile, the individual stories got more interesting. South Africa's central bank hiked rates and the rand still fell. Brazil's central bank, by one strategist's account, went the other way and cut. Asian central banks in Korea and Indonesia have quietly been hiking. And the US diesel export ban, the shock that did most of the damage to EM last week, is still being decided one presidential interview at a time.

TL;DR

The dollar is breaking higher, and carry is "taking a breather." J.P. Morgan's FX team calls it a "rotating pillar" between the dollar and carry trades. Right now the dollar leg is in charge. They are sticking with a constructive dollar view but expect carry to catch up once rates markets calm down.
US yields kept climbing. The 10-year Treasury reached 5.24% on NAB's Monday Morning Call, up 86 basis points (0.86 percentage points) in three months. The dollar index was at 101.18 midweek. PIMCO expects one or two more quarter-point Fed hikes.
Carry liquidation is now an open question. MUFG warned that volatility is picking up in EM currencies and that FX carry, "a hugely profitable trading strategy," could be sold to cover bond losses elsewhere. It singled out the Mexican peso and Chilean peso as vulnerable. The Brazilian real "has held in better."
The SARB hiked to 7.25% and the rand still weakened, to about R16.45. The hike was 85%+ priced in. Oil above $100 mattered more. Rand Merchant Bank expects inflation above 5% in Q4 and no more hikes until around May.
The diesel ban is still undecided. Trump says he is considering it "very seriously." His energy secretary and at least one senator say it won't happen. J.P. Morgan's EM team now calls the Chilean peso a "symmetric" risk after its selloff, and says Mexico is much less exposed than the headlines suggest.
Brazil is the odd one out. Macro strategist Jay Pelosky says the Brazilian central bank cut rates last week and could cut 200-300 basis points over the next year, and "the surprise could be that the currency appreciates."
Asia is tightening. Nomura notes that Korea's and Indonesia's central banks have already raised rates. Dollar-yen tested 158.50, and Saxo is asking "when's the intervention?"
The Aussie dollar hit 0.7004, its lowest since August 4, before the RBA's widely expected hike to 4.6% on Tuesday.

What's new

J.P. Morgan: the dollar's turn, and carry waits in line

The most useful currency podcast of the week was J.P. Morgan's At Any Rate episode Global FX: US diesel ban, dollar view, G10 central banks, recorded September 25. Meera Chandan, co-head of FX strategy, set the tone: "the dollar's finally breaking higher."

Her point, though, was that the move is still small. Given how far markets have repriced the Fed, and how much wider US interest rates are than everyone else's, she said "the dollar should have been actually a lot stronger." Her colleague Patrick Locke is the team's dollar optimist. He said Fed Chair Kevin Warsh "kind of righted the ship" at the September meeting. He also noted that the dollar had been trading cheap against J.P. Morgan's fair-value models, and that discount has started to "collapse" since the meeting. US business surveys "blew the doors off the thing," he said, with "57, 58 handles across the sub-components," some of the best employment readings in three or four years, and price pressure coming from wages and supply chains, not just energy.

The line that matters most for EM carry came from Chandan. She described a "rotating pillar, if you will, between carry and the dollar." FX carry "seems to have taken a breather as this repricing is going through." But "once we get some of the stabilization in rates markets, if we get it, you know, we actually can see a catch up from the carry side." For now: "we're in the midst of the dollar leg right now. So definitely respecting that and sticking with it."

Why it matters: this is the same bank that told clients three weeks ago that carry would keep winning. It hasn't turned bearish on EM. It is saying the next few weeks belong to the dollar, and carry recovers only if Treasury yields stop rising. Next week's US jobs report (consensus about 100,000) is the next test. Chandan's euro target is still $1.13-1.14 for the second half.

The diesel ban, currency by currency

Same episode, and the most detailed EM discussion of the week. Anezka Christovova of J.P. Morgan's EM team split the diesel risk into two steps. Step one is countries that buy their diesel directly from the US and could see contracts go unfilled. Step two comes "after a month or two," when those buyers find new suppliers and the problem becomes a global price shock.

On step one:

Chile and Peru "rely on US diesel imports a lot and do not have storage." Peru's currency "has finally reacted a little," but its central bank intervenes often, so volatility stays contained.
The Chilean peso "has seen a dramatic impact." It has fallen so far compared with currencies with similar fundamentals that she now sees "a symmetric sort of risk." In her words, "if things turn better, it could actually be the one that also tactically recovers more than other currencies."
Mexico is less exposed than people assume. Thanks to new refining capacity, "they used to import 60% of their diesel consumption from the US in 2023. And now it's only 25%." She also asked whether a ban on a country sharing a long land border and deep supply chains with the US is even "practically possible," or whether it would come with exemptions.
Brazil and Colombia are "much less exposed," but the Colombian peso still reacted sharply because of the broader selloff.

On step two, the list gets longer. Measured by imports of refined fuel as a share of the economy, "Philippines stands out, South Africa stands out." South Africa "imports more product as a share of GDP than Chile," just not from the US. She thinks "the product dimension has been perhaps a little underappreciated by the market" in the rand. One currency where she thinks the fear is overdone: the Hungarian forint, which people treat as highly energy-sensitive, but "they do have refining capacity."

Chandan added some scale. Global trade in refined products is about 23 million barrels a day, so a US ban has to be measured against that. She is "just not so sure this will break the camel's back."

Is the ban even happening? The White House keeps changing its mind

On AG Bull's Wiesemeyer's Perspectives (September 28), Washington policy analyst Jim Wiesemeyer called it "Trump's etch-a-sketch energy policy." First Trump said he favored a ban. Then Energy Secretary Chris Wright "pooh-poohed it." Senator Ted Cruz told refinery lobbyists he had White House assurances that exports would not be banned, according to Bloomberg reporting cited on the show. Then on Sunday Trump said he was considering it "very seriously." Wiesemeyer's read: "the administration has yet to settle on a durable policy position," and farm-state polling on diesel prices is "very negative."

On MacroVoices #551 (September 25), the host cited Politico's report that Trump is "committed to at least a 90-day ban." Rabobank's Michael Every warned that in an integrated global energy system, "if you suddenly stop the U.S. exporting diesel, it doesn't just solve one problem. It creates lots of others in equal measure," including more expensive crude.

J.P. Morgan's commodities head Natasha Kaneva ran the numbers on At Any Rate's Global Commodities: Day 31 and beyond (September 25). The US uses about 3.6 million barrels a day of diesel and exports 1.3-1.6 million. Keeping even part of that at home could refill US inventories to their five-year average "within two weeks." A 30-day ban "could work surprisingly well, at least initially." After that, refiners would be stuck making diesel nobody wants, crude runs would fall, and "some of the initial price relief would begin to reverse." For EM, that is the key point. A short ban hurts Chile, Peru and the other direct importers badly for a few weeks. A long ban turns into a global fuel-price problem for South Africa, the Philippines and the rest of the refined-fuel importers.

MUFG: the carry trade is the obvious thing to sell

On Fixed Income contagion risks (September 25), MUFG's FX strategist gave the bear case in plain terms. When bond portfolios are losing money, investors sell whatever has been working to cover it. "Obviously, FX carry has been a hugely profitable trading strategy. So you'd include short yen in that. But also, I think Latam, very attractive carry in a lot of Latam currencies."

His watch list: "definitely vulnerabilities for MEX, which has come under pressure this week. Chile and peso. Brazilian real has held in better, but still vulnerabilities there." Then the warning: "vol is picking up in emerging market FX. It's obviously picked up in dollar-yen as well. And that's a recipe for also encouraging liquidation of carry." MUFG's quant team also found that "the more structural metrics do indicate conditions are changing. So it could be the start of a more sustained turnaround" in the dollar.

South Africa: a rate hike that didn't help the rand

The South African Reserve Bank raised its main rate by 0.25 percentage points to 7.25% on September 23, even though August inflation was only 4.4%. On 702's The Money Show, Rand Merchant Bank chief economist Isaah Mhlanga said the bank "should have hiked in July already," because inflation expectations had crept up to 4.4% for this year and stayed above 4% for the next two. The SARB raised its oil price assumption by $8 to $90 a barrel for this year, $80 for next year and $75 for 2028. Mhlanga expects "two more increases in fuel prices locally that would lift inflation well above 5%," with fourth-quarter inflation averaging above 5%. His call: "flat for the remainder of the year," with "no change until sometime in May." He also cut his growth forecast to 1.1%, from 1.5% at the start of the year.

The currency detail is what matters here. The rand fell to about R16.45 per dollar after the hike. Viv Govender of Rand Swiss explained that "85-plus percent chance of a rate hike" was already priced in, so there "wasn't much on the other side" to push the rand higher, while Brent "well above $100 a barrel" was "a far more impactful factor."

Before the meeting, investor Simon Brown on WorldWide Markets (September 22) said part of the SARB's logic is to "stay sort of anchored around the US," because falling too far behind the Fed would hurt the rand. He described the rand, based on a conversation with Standard Bank's Tom Gale, as "a markedly less volatile currency" this year. The platinum story, which usually supports the rand, has cooled. Platinum is trading around $1,780, about 39% below its January record of over $2,900. The market swung from a nearly 1.5 million ounce deficit in 2025 to a forecast 265,000 ounce surplus this year, as investment demand and Chinese jewellery buying collapsed. The miners are still very profitable at these prices, though. Brown noted the Northam–Valterra takeover interest, with a December 1 deadline, and that AI-related demand for ruthenium and iridium is a new source of growth.

Why it matters: the rand is caught between a central bank that is doing its job and an oil price that keeps overpowering it. J.P. Morgan's point that South Africa imports more refined fuel relative to its economy than Chile does makes the rand a slow-burn diesel story, even though it buys little US diesel.

Brazil: cutting while everyone else hikes

On Macro Hive's Ep. 377 (September 25), Jay Pelosky of TPW Advisory, who launched Morgan Stanley's global EM strategy product in the mid-1990s, said that while everyone watched the Fed, "another central bank that met last week and cut rates... was the Brazilian central bank." He cited Morgan Stanley's view of 200 basis points of cuts over the next year and said himself "200 to 300 basis points of rate cuts in Brazil over the next year." On next month's presidential election: "It's a very tight race right now." Brazil's financial district would prefer the challenger, but "either way, we don't think it's going to really shift the dynamic." His conclusion: "the surprise could be that the currency appreciates, not depreciate. So we like Brazil a lot." He holds Latin America through the ILF ETF, which is mostly Brazil and Mexico, with about 30% in materials and energy.

Dave Iben of Kopernik Global Investors spent the summer doing research in Brazil and told The Meb Faber Show (September 25) that "the number of people I met that were bullish on their stock market, zero." Locals told him the real "was 490 and then it's 520. Boom." His pitch: "your inflation rate's kind of the same as the US inflation rate, but your rates are 12 to 14 and ours are 4. I mean, which currency ought to do better, man?" And "if rates drop in Brazil, the stock market will run up."

Keep in mind: these are two long-term investors with a view, not a trading desk. They also contrast with State Street's flow data from last week on There's Something About Carry, which showed real-money investors underweight the real and selling Brazil before the election. The real "held in better" this week, per MUFG. Their shared point is that rate cuts don't have to weaken a currency when the real interest rate starts this high.

Asia: hiking quietly, and the yen at the line

Nomura's Southeast Asia economist Euben Paracuelles pointed out on The Week Ahead (September 25) that Korea and Indonesia are places "where we've already seen the central banks there hiking interest rates." He expects Korean headline inflation to ease to 2.9% from 3.1% on base effects, with core easing too, which "would suggest that demand-side pressures are still relatively weak." Indonesian inflation is expected to rise to 3.3% from 3.2%. On China, Nomura's Jing Wang expected the Trump-Xi summit to "extend the current truce" through January 10, possibly with tariff cuts on about $30 billion of goods. By Monday, NAB said both sides had agreed to cut tariffs on $30 billion of goods each, nearly half of the US share being Chinese toys. Sally Auld called that "not super huge in the scheme of trade between the US and China."

On the yen, Saxo's John Hardy opened This is nuts - when's the intervention? (September 24) by describing a bond market "in meltdown mode." Dollar-yen had tested 158.50 "almost to the pip," which he called "the local key for unlocking the range," with 160 above it. Japan's finance minister offered only "intervention light" rhetoric without naming levels. Hardy's bigger point is that if bond yields keep rising at this pace, "intervention risk is ratcheting higher by the hour," and any global move to calm bond markets would reach Japan too.

The Aussie and the RBA

On NAB's Morning Call Another open and shut case (September 27), NAB said the Australian dollar "did just escape a revisit to levels below 70 cents," with a low of 0.7004, the weakest since August 4. It was "not a good week for the Aussie at all," and most of the losses came before a surprise rise in unemployment. On Rates, bonds and oil – how high can they go (September 28, Australian Tuesday), the Aussie was "stuck at 70.2 US cents" heading into the RBA. NAB's Sally Auld expects a hike to 4.6%, "its highest level since 2011." She thinks the vote split and Governor Bullock's press conference will matter more than the hike itself. She argued "Australia does appear to be running a reasonably unique narrative": its business surveys fell while US and European ones rose, so "lots more rate hikes" priced elsewhere "doesn't feel like the right sort of story for Australia." MUFG added that an RBA hike "should be fairly supportive for Aussie," but in a carry unwind "Aussie will certainly suffer."

The debate

Bear camp: this is how carry trades end. It had the stronger voices this week. MUFG's argument is simple and a little scary. When bond losses pile up, you sell what has made money, and EM carry has made a lot. Volatility is rising in EM currencies and in dollar-yen, and MUFG's quant work suggests the dollar's turn "could be the start of a more sustained turnaround." Add a US 10-year at 5.24% and rising, a Fed still hiking (PIMCO's Tiffany Wilding, on A Recalibration, Not a Rate-Hike Cycle, sees one or two more quarter-point hikes, noting that Warsh says he would be "hard-pressed" to call financial conditions restrictive), oil above $100 with no Iran deal in sight before the US midterms, and a diesel ban that can't be ruled in or out. The rand's reaction to its own rate hike shows what happens: good central-bank behavior doesn't matter when the global shock is bigger.

Bull camp: a pause, not an ending. J.P. Morgan's FX team makes the strongest version. The dollar leg is having its turn, but carry "can see a catch up" once rates stabilize. Currencies that have already sold off hard, like the Chilean peso, are now "symmetric" risks that could bounce first. Mexico's diesel exposure has fallen from 60% to 25%. Hungary's energy fears look overdone. Brazil gets the long-horizon bull case from Pelosky and Iben: rates of 12-14% against inflation near US levels give a lot of room to cut without hurting the currency. Asian central banks hiking early (Korea, Indonesia) also suggests the managed currencies there have some buffer.

Where it lands: both camps agree that the trigger is US Treasury yields. If they stabilize, carry catches up. If they don't, the unwind MUFG describes becomes the main story.

The trades in play

Short-term, respect the dollar. J.P. Morgan is "sticking with" the dollar leg. The next catalysts are Wednesday's core PCE inflation data and Friday's US jobs report (consensus about 100,000, unemployment 4.1%). MUFG thinks it would take a jobs number "close-ish to zero" for yields to drop meaningfully.
Chilean peso as a bounce candidate. J.P. Morgan's EM desk: after a "dramatic" underperformance, risks are "symmetric," and it could "tactically recover more than other currencies" if the diesel story eases. The bear view is that CLP is the most directly exposed to a longer ban and is on MUFG's vulnerable list. The next data point is whether the White House actually signs a ban, and for how long.
Mexican peso: exposed to carry unwinds, less to diesel. MUFG flags MXN as vulnerable because it is so popular (last week's State Street data showed speculators long MXN by a lot compared with history). J.P. Morgan's diesel numbers argue the fundamental hit is smaller than feared. If there is a carry unwind, positioning is the risk, not diesel.
Rand: don't count on the SARB. With the hike already priced and RMB expecting a pause until May, the rand's direction depends on oil and refined-fuel prices. Two more local fuel-price increases are expected.
Brazil for patient money. Pelosky's cutting-cycle view via ILF, and Iben's real-rate argument, are multi-year calls. The near-term risk is the October election.
Dollar-yen at 158.50-160. Saxo sees this as the zone where intervention risk rises sharply. It is also a source of volatility that MUFG says encourages broader carry liquidation.
AUD into the RBA. A hike to 4.6% is priced. NAB is watching the vote split and guidance. A dovish signal with weakening local data, combined with a carry unwind, would push the Aussie back below 70 cents.

Read-throughs

Broad dollar: the dollar index was at 101.18 midweek on CNBC's Morning Call (September 24), strengthening "as bonds have weakened," with the 10-year at 5.13% and 30-year at 5.43%. By Monday NAB had the 10-year at 5.24%. J.P. Morgan thinks the dollar's fair-value discount is closing.
EM local bonds and dollar bonds (EMLC, EMB): with carry pausing and US yields still rising, last week's damage (J.P. Morgan's GBI-EM down about 2.2% from its late-August peak, per EM Fixed Income: Navigating some sudden market turbulence) got no relief this week. The bond-selloff-to-carry-unwind route MUFG describes runs straight through these funds.
EWZ / ILF: the bull case rests on Brazil's cutting cycle. Pelosky prefers the region through ILF because of its 30% materials and energy weighting.
EZA and South African miners: platinum is well off its highs, but Brown says PGM miners are "very, very cash generative" at current prices. The rand faces oil and diesel pressure more than metals pressure.
EWY: Pelosky owns South Korea for memory-chip exposure at "five times forward earnings," and Iben has trimmed Korea after its big run. Korean inflation easing gives the Bank of Korea room not to keep hiking.
Brent and diesel: Brent was above $105 on Monday. NAB's Auld pointed out that even the end-2027 contract is priced above $80, a sign the market expects "structurally higher prices." Iranian officials were reported to be privately pessimistic about a deal before the November midterms.
AUD as a China proxy: the Trump-Xi tariff deal was too small to help. The Aussie is trading on US yields and the RBA, not China.
EUR/USD and CE3: J.P. Morgan still targets $1.13-1.14 for the second half, since European growth keeps surprising upward. For CE3, its view that market worries about the forint's energy exposure "have been larger than what we truly see in the numbers" matters most.

What changed

The dollar took over from carry. Last week the story was EM bonds selling off. This week J.P. Morgan's FX team said outright that the dollar is "breaking higher" and carry is "taking a breather."
"Carry liquidation" came into use. Last week State Street said positioning wasn't crowded. This week MUFG described how an unwind would happen and which currencies (MXN, CLP) are first in line.
The diesel ban moved from shock to uncertainty. Last week it was a reported 90-day ban. This week it's on-again, off-again. J.P. Morgan now sees Chile as a two-way risk and Mexico's exposure as far smaller than it looked (25% of diesel from the US, down from 60%).
The SARB decision came through. A 25 basis point hike to 7.25%, and the rand weakened anyway, to about R16.45.
Brazil got its first real discussion in weeks, with a bullish take (a rate cut, the real possibly appreciating) that runs against last week's reports of real-money selling.
US yields went higher again. The 10-year went from 5.15% to 5.24%, and it is up 86 basis points in three months.