FX Derivatives: 2H FX Vol Outlook: Carry the day, Vol the Tail

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FX Derivatives: 2H FX Vol Outlook: Carry the day, Vol the Tail

pendent and prone to short-term and pockets along the curve where vol has not fully

repricing rather than directional conviction (Figure 42026couldfolowthe2021(tapertantrum)volplaybokifUSmidtermsoranothervolshockapear.). The repriced—guiding us toward controlled short-vol carry

prospect of a more hawkish Fed and potentially more focus expressions or structures with explicitly capped downside.

on the Fed under a Warsh chairmanship adds to this back-

ground churn risk. Still, a modest grind higher in vols is Cash carry via options: selective, and increasingly struc-

unlikely to materially disrupt carry dynamics. That is corrob- ture-dependent

orated by investor behaviour which remains anchored in carry

USD/HKD stands out as an extreme outlier in terms of carry/collection, but with growing interest in overlaying defensive

vol ratio (Figure 5HKDvol/caryisofthecharts,ascaryheldandvolcolapsed.), with carry holding up as vol has col-structures—less as outright bearish expressions on markets,

lapsed, pushing the ratio to the top of the rankings. Latam fol-and more as pragmatic hedges against an eventual normaliza-

lows—more visibly on crosses such as EUR/BRL and CHFtion from these compressed levels.

(with the usual caveat on liquidity, particularly in CHF),

although the upcoming October Elections in Brazil all butFigure 4: 2026 could follow the 2021 (taper tantrum) vol playbook if

US midterms or another vol shock appear. rule out BRL-based carry structures. Within G10, GBP/CHF

screens as the cleanest carry/vol expression, helped by

depressed realizeds and contained near-term political risk

through the summer, but something to keep in mind for later

in Q3 and Q4. Across these, the key is in matching structure