As an erstwhile news reporter, my eye is always drawn to a catchy headline. So I was intrigued by a recent blog by Dovile Silenskyte, director of digital assets research at WisdomTree, headed ‘The world's biggest market is hiding in plain sight’.There is no arguing with the first part of that headline. Daily turnover in the global FX market is close to $10 trillion, which dwarfs that of even the largest stock exchange. The vast majority of trades (around 90%) involve the US dollar, with EUR/USD accounting for about one-fifth of all trading activity.Latin American Carry Trades Outperform as Volatility Stays LowThe strongest returns this year have generally come from high-yielding emerging market currencies rather than the traditional G10 pairs. The best performers include the Brazilian real (which has benefitted from very high domestic interest rates), the Mexican peso – due to relatively stable domestic fundamentals – and the South African rand as a result of its commodity exposure.The biggest winner to date is the real, which has strengthened 8% against the dollar since January on the back of an interest rate currently sitting at 14%.More importantly for investors, the carry trade has been an unusually good FX product in 2026. By April, one measure of the strategy was up approximately 12%, its strongest start to a year since 2023.The most valuable carry trade has been to borrow JPY/CHF, buy BRL/MXN/ZAR and collect the interest rate differential. The return on this trade has been profitable due to a combination of very high yields in Brazil and South Africa and relatively subdued FX volatility making investors more willing to hold positions.The dollar is rolling over, and that resets the math on every other asset.A weaker dollar loosens financial conditions everywhere, and Latin America's currencies are already up 19% against it, the flip side of capital leaving the crowded US and AI trade.When the dollar falls,… pic.twitter.com/fx2dpWUcAR— Kurt S. Altrichter, CRPS® (@kurtsaltrichter) August 4, 2026A more sophisticated version of carry is ‘hawkish carry’ - buying currencies where markets are under-pricing the possibility of rate rises or a slower easing cycle. This has become important because simply buying the highest nominal yield can leave investors exposed to a sudden rate cut cycle.JP Morgan's mid-year emerging market strategy remained pro-carry but specifically favoured currencies where central banks were becoming more hawkish. It was overweight Latin American and EMEA currencies and underweight Asia, an approach that favoured currencies such as the rand, Czech koruna and Chilean peso.This year’s energy and metal price volatility has made terms-of-trade trades particularly effective. Higher commodity prices improving their trade balances while investors simultaneously seek relatively high yields has helped currencies such as the real and Colombian peso. Latin American carry trades are particularly attractive partly because the region's commodity exporters have been largely insulated from the energy shock.Another successful approach has been valuation-based emerging market FX. According to Franklin Templeton, many emerging market currencies entered 2026 with depressed real effective exchange rates while the dollar remained expensive, creating an unusual asymmetry whereby emerging market currencies could appreciate even without a major dollar collapse.Chris Turner, global head of markets and regional head of research for UK & CEE at ING, notes that Latin American currencies were some of the top performers in the FX space last month. He agrees that low FX volatility is sending carry trade money into a region that is a little less exposed to the energy shock than EMEA and Asia and reckons that despite the approaching presidential elections, the Brazilian real can remain stable and outperform the steep forward curve.Asian emerging market FX is another area where trading opportunities and positioning have been particularly significant. The Korean won, Indian rupee, Indonesian rupiah, Philippine peso, Thai baht and renminbi have all attracted considerable attention.Investor positioning in the won has swung to its most bullish level in more than 10 months, following a significant appreciation and increased exporter conversion/repatriation flows. The renminbi has also been an important market because of the interaction between the onshore CNY and offshore CNH markets - two markets that have remained tightly linked in spot while exhibiting meaningful differences in forward pricing.In terms of products, BRL/USD forwards and swaps have done well while options have not necessarily produced the highest absolute returns. However, selling volatility/selling FX options has been an attractive trade during periods when realised volatility has remained low. The most lucrative approach here has been long high-yield emerging market currencies + short/cheap funding currencies + short FX volatility as that combination effectively monetises both the carry and the relatively low cost of currency protection.It is, though, important to note that there has been a significant change in the risk profile of the yen as of late.Yen Weakness Changes the Risk Picture for FX TradersIn late July, the Japanese currency plunged to almost 164 against the dollar - a 40-year low - triggering a joint move where the US bought yen to curb extreme market volatility. Traders had sharply reduced bearish bets on the yen following the initial intervention but renewed weakness points to persistent downward pressure.The yen has since dropped to 159, erasing about half of the sharp gains it made following coordinated support from the US Treasury and Japanese authorities.The yen has been weakening gradually since the large joint Japan–US FX intervention, a sharp reminder that the key to fixing a currency "mispricing" is getting the policy mix right.The longer Japan delays in doing so, the more elusive the goal of this historic intervention… pic.twitter.com/esrdsA9NWz— Mohamed A. El-Erian (@elerianm) August 10, 2026There has also been strong activity in exchange-traded FX. CME reported 1.2 million FX contracts of average daily volume in June (up 6% year-on-year) while EBS spot FX average daily notional value rose 7% to $68 billion, suggesting that increased activity is not confined to bilateral OTC markets.For equity investors concerned about the impact of exchange rate movements on the value of their share portfolio, Silenskyte says currency-hedged, exchange-traded products (ETPs) can play an important role by allowing them to focus primarily on the performance of their chosen asset.“A UK investor buying US equities may want exposure to the growth of American companies but not necessarily exposure to movements in the dollar,” she says. “A currency-hedged ETP can help separate those two sources of return.”Of course, hedging is not always the right choice as currency exposure can also enhance returns and may provide diversification benefits. However, Silenskyte suggests that investors should make an active decision about whether they want currency exposure rather than accepting it unintentionally.This article was written by Paul Golden at www.financemagnates.com.