BNY’s iFlow Carry index moved into negative statistical significance for the first time in 2026, pointing to a shift in how currency flows relate to rate differentials. The gauge is defined as the daily Spearman rank correlation between 32 currency flow indicators and their corresponding local bond yields, and it is now showing flows becoming increasingly negatively aligned with those yields, consistent with a carry unwind. The note also references a ceasefire in the Gulf and a limited hawkish pivot from the Fed as features of a firmer risk backdrop as the liquidation process progresses.
In screening for potential mean reversion, the framework looks for currencies with the largest potential ranking changes should carry demand turn positive. BRL longs are cited under this criterion: the currency is described as only moderately overheld yet the most-sold carry currency over the past month. Elsewhere, other high-yielders remain net long but with more muted flow scores, while CHF has been well-bought over the past month and now has a comfortably positive holdings score despite zero rates; unlike JPY, it is not characterised as excessively undervalued.
Carry Unwind Signals and Improving Risk Backdrop
We are seeing an unusual signal in currency markets for the first time this year, as the link between fund flows and bond yields has turned negative. This indicates that carry trades are being unwound on a significant scale. While this selling could continue briefly, we view it as a contrarian indicator pointing to a strong potential recovery.
The environment for risk is getting better, which supports this view. The VIX index, a key measure of market fear, has fallen from over 22 in May to below 17 this past week, and a recent ceasefire in the Gulf has calmed oil markets. Further, the Federal Reserve held rates steady at its June 17th meeting, signaling a less aggressive stance for now.
Opportunities in BRL Recovery Versus CHF Weakness
For a rebound, we believe the Brazilian Real offers the best risk-reward profile. The BRL was the most heavily sold high-yield currency over the past month, dropping 8% against the dollar in May, but has since stabilized near 5.30. With Brazil’s central bank rate at 10.5%, the potential return for a long BRL position is compelling as the recent pessimism fades.
On the other side of the trade, the Swiss Franc looks like an ideal funding currency. The CHF saw significant buying as a safe haven, with CFTC data showing speculative positions turning net long for the first time since 2024. This makes it over-held for a zero-rate currency and a prime candidate to sell.
Derivative traders should consider positioning for BRL strength against CHF weakness. This could involve buying BRL call options or selling USD/BRL puts to gain upside exposure to the real. At the same time, selling CHF call options could fund this view, taking advantage of its recent unusual strength.
Even as global risk appetite improves, we must remember that U.S. markets remain strong. This means focusing on specific country stories is more important than ever. The unique situation in Brazil, combined with the overbought status of the franc, presents a focused opportunity outside of broad market moves.
