Goldman Sachs: Low volatility and rate divergence still favor FX carry, but financing currencies need to be selected more carefully

Overview

This is a Goldman Sachs Global FX Trader report titled "Cool, Calm and Collected." The report argues that the current FX market is still dominated by low volatility and interest-rate divergence, with carry returns playing an important role in year-to-date returns for major USD currency pairs. Although concerns in commodities and equity markets have risen, Goldman Sachs believes the sources of volatility remain mostly at the micro level and have not yet evolved into macro shocks large enough to disrupt the FX carry environment.

Core views

The core views include: first, the USD should not simply be viewed as a low-cost funding currency, because it still has relatively high-yield characteristics and USD call options can still serve as a cross-asset hedge. Second, sterling's recent rally has been too fast, with fundamental and valuation constraints still in place, so the report recommends tactically shorting GBP/USD. Third, the KRW's July rebound is more of a temporary breather, and if investor allocation or hedging behavior does not change, there is still no basis for sustained KRW strength. Fourth, the Hungarian forint is constrained in the short term by energy prices, risk appetite, and crowded long positioning, but still has a medium-term fundamental appreciation story. Fifth, the CHF and CAD can still serve as selective funding currencies, while the THB remains under pressure due to gold and real-rate factors. Sixth, many of the conditions for AUD/NZD downside have already been met, and in frontier markets the preference remains for selective high-carry exposure.

Analysis framework

The report adopts a top-down global FX strategy framework, combining inflation, central bank policy, rate differentials, real rates, carry returns, volatility, valuation models, equity and bond flows, commodity prices, and geopolitical risks to assess currency performance. For different currency pairs, the report further distinguishes among spot price, total return, funding characteristics, hedging characteristics, and tactical trade expression.

Methodology notes

• FX valuationGSBEER

  behavioral equilibrium exchange rate model

  The report uses GSBEER-implied performance to assess whether sterling's move has deviated from cyclical fundamentals, and points out that recent GBP performance is inconsistent with the model signal.

• FX valuationGSDEER

  Goldman Sachs dynamic equilibrium exchange rate valuation framework

  The report lists GSDEER estimates and degrees of misalignment in its return forecast and valuation tables to compare the relative valuation of different currencies.

• FX valuationGSFEER

  Goldman Sachs fundamental equilibrium exchange rate valuation framework

  The report lists GSFEER estimates as well as bilateral and trade-weighted misalignments in the valuation table to help assess the degree of medium- to long-term currency deviation.

• Strategy indicatorcarry-to-vol

  carry return relative to volatility

  The report uses carry-to-vol to measure the attractiveness of carry per unit of volatility, and notes that both USD/CHF and EUR/CHF are near multi-year highs.

Asset mapping & comparison

Structured mapping from thesis to named assets (strengths, weaknesses, peers, risks).

• USD

  Relatively high-yield currency and potential cross-asset hedging tool

  Strengths

  Relatively high rate levels, and USD call options can be used to hedge policy-path divergence and cross-asset risk.

  Weaknesses

  Cooling U.S. inflation limits the scope for a larger hawkish repricing and also reduces the probability of large spot volatility.

  Comparison

  Compared with traditional funding currencies, the report reminds investors to respect the USD's high-yield characteristics.

  Risks

  If policy divergence widens again, the USD may strengthen temporarily; if risk appetite improves and carry broadens, the USD's directional advantage may be limited.

• GBP/USD

  Tactical short target

  Strengths

  The short thesis comes from sterling's overly rapid rally, valuation dislocation, and fundamental constraints.

  Weaknesses

  Sterling still has medium-term positives such as a pro-cyclical global backdrop, EUR/GBP carry demand, M&A inflows, and improving UK-EU relations.

  Comparison

  The report believes that compared with EUR/GBP, Cable is currently the higher-quality expression.

  Risks

  If UK political expectations continue to improve, capital inflows persist, or the USD weakens, the short GBP/USD position may come under pressure.

• KRW

  Temporary rebound but insufficient basis for sustained appreciation

  Strengths

  The KRW's July appreciation was supported by rate hikes, restrictions on leveraged investment, some capital inflows, and safe-haven-style repatriation during extreme equity-market declines.

  Weaknesses

  The KRW still looks weak on most valuation indicators and has not generated sustained positive feedback from the AI export boom.

  Comparison

  Compared with the strong performance of the Korean equity market, the KRW had not previously benefited persistently, and the stock-FX correlation is unstable.

  Risks

  If Korean investors' overseas allocation, unhedged exposure, and foreign equity-hedging flows do not change, the KRW will struggle to strengthen sustainably.

• HUF

  Short-term headwinds alongside medium-term tailwinds

  Strengths

  In the medium term, the report still sees the forint toward around 350 in six months, supported by EU fund inflows, lower risk premium, and improving fundamentals.

  Weaknesses

  In the short term, it is pressured by crowded long positioning, rising energy prices, and weaker risk appetite.

  Comparison

  Among EM currencies, HUF exhibits relatively high beta and is more sensitive to global risk and energy shocks.

  Risks

  Winter energy supply, tariffs related to Russian oil imports, the pace of MNB rate cuts, and policy communication could all affect the exchange rate.

• CHF

  Preferred G10 funding currency

  Strengths

  Low and stable Swiss inflation, an on-hold SNB, and policy-rate differentials versus other G10 countries make CHF funding highly attractive on a carry-to-vol basis.

  Weaknesses

  Its correlation with gold may support the franc if gold resumes its uptrend, weakening the funding trade.

  Comparison

  The report believes that on a three-month horizon, CHF funding is more attractive than the more common JPY funding.

  Risks

  Higher gold prices, an SNB shift toward a more neutral intervention bias, and energy shocks triggering safe-haven demand could all push CHF higher.

• CAD

  Can still serve as a funding currency, but the appeal of further depreciation has diminished

  Strengths

  The wide USD-CAD rate differential and uncertainty around trade negotiations still support CAD as a funding leg.

  Weaknesses

  With the BoC remaining on hold and communicating in a more balanced manner, the scope for further spot depreciation is less attractive than before.

  Comparison

  Compared with USD funding, CAD can reduce risk exposure to some extent and improve carry.

  Risks

  Cooling U.S. CPI limits near-term Fed hawkish pricing, which may ease upward pressure on USD/CAD.

• THB

  Low-yield Asian funding currency

  Strengths

  Against a backdrop of low real rates, THB is suitable as the funding leg for regional high-yield currencies.

  Weaknesses

  It is dragged down by falling gold prices, equity outflows, negative real rates, and rising U.S. real yields.

  Comparison

  The report says THB has shifted from being one of the better-performing Asian currencies in 2025 to the weakest low-yield Asian currency this year.

  Risks

  Oil prices, gold prices, tourism prospects, BoT policy, and changes in capital flows could all alter the THB path.

• AUD/NZD

  Relative-value trade biased to the downside

  Strengths

  The relative policy backdrop, domestic data divergence, and rate-differential moves are more supportive of NZD and therefore of AUD/NZD downside.

  Weaknesses

  A renewed rise in energy prices could still support AUD and disrupt the downside thesis.

  Comparison

  The report believes AUD/NZD has recently become less responsive to commodity prices and more responsive to rate differentials.

  Risks

  If RBNZ hike expectations fail to materialize, the RBA turns more hawkish, or China growth stimulus exceeds expectations, AUD/NZD downside may be constrained.

• Frontier FX

  Selective high-carry exposure

  Strengths

  Frontier-market currencies such as TRY, EGP, NGN, and KZT offer carry levels meaningfully above those of high-yield EM currencies.

  Weaknesses

  Renewed geopolitical escalation and outflows from local bond markets can amplify short-term spot volatility.

  Comparison

  Compared with ordinary high-yield EM currencies, frontier-market currencies offer more prominent carry, but also higher liquidity and event risk.

  Risks

  Middle East developments, foreign positioning in local bonds, managed depreciation, policy credibility, and reversals in capital flows are key risks.

Key data

• GBP/USD trade recommendationShort GBP/USD, target 1.3250, stop 1.3600The report believes sterling's July rally is inconsistent with GSBEER-implied performance, and that policy and fiscal constraints have not yet been removed.
• Six-month HUF forecastEUR/HUF 350The report believes the forint faces short-term resistance, but its medium-term fundamental appreciation story remains strong.
• BoT 2026 GDP forecast2.3% yoy, previous 1.5%The Bank of Thailand raised its GDP forecast, but the baht is still dragged down by gold, capital flows, and real-rate factors.
• Thailand fiscal stimulusTHB 400bn emergency decreeThe report says the measure contributes about 0.6 percentage points of growth support.
• Thailand inflation and policy ratePolicy rate 1.0%, June inflation 2.4% yoyLow nominal rates combined with rising inflation have pushed real rates negative, which is bearish for THB.
• Global gold price changeAbout USD 4000/oz, near USD 5000/oz at the start of the yearThe report views the decline in gold as one of the key reasons for THB weakness, and also notes that a rebound in gold could support CHF.
• AUD/NZD options viewRecommend AUD/NZD 6m 1.1650 putsThe report believes relative policy, domestic data, and rate-differential conditions now support more downside in AUD/NZD.
• Frontier market preferenceSelectively long TRY, NGN, and KZT versus USD; continue to favor gradual medium-term appreciation in EGPHigh carry can cushion total returns amid spot volatility, but geopolitical developments and local-bond flows remain risks.

Impact & implications

For portfolios, the report implies that current FX positioning should not simply bet on large directional USD moves, but should focus more on carry, the selection of funding currencies, and relative-value expression. The low-volatility environment is favorable for the continuation of carry strategies, but if shocks in commodities, equities, or geopolitics spread from the micro level into macro volatility, the carry-friendly environment may be interrupted. Strategically, Goldman Sachs leans more toward selectively choosing funding currencies, using USD call options as a cross-asset hedge, and expressing tactical views through GBP/USD, THB/INR, AUD/NZD, and frontier-market currencies.

Risks

• If shocks in commodities, equities, or geopolitics evolve from the micro level into macro volatility, they could disrupt the current carry-friendly environment.
• If the U.S. policy path diverges significantly again from other central banks, it could trigger larger volatility in the USD and major currency pairs.
• Higher energy prices would pressure HUF, affect the CAD and AUD/NZD theses, and increase frontier-market risks.
• A renewed sharp rise in gold prices could support CHF and weaken the CHF funding trade, while also potentially altering THB performance.
• Changes in UK politics, fiscal policy, and UK-EU relations could affect the GBP/USD short recommendation.
• If Korean investor allocation and FX hedging behavior change, the judgment on KRW persistence could change.
• Foreign holdings of frontier-market local bonds remain elevated, and outflows could lead to spot losses and stop-loss risk.

What to watch

• U.S. inflation, Fed repricing, and the USD rate path around the July FOMC.
• Whether GBP/USD falls back toward the 1.3250 target or hits the 1.3600 stop.
• Whether the deviation of EUR/GBP and GBP/USD from GSBEER-implied levels narrows.
• The impact of KOSPI performance, Korean overseas investment, and foreign equity-hedging flows on KRW.
• MNB meeting language, expectations for a 25bp rate cut, and HUF stability around the 355-360 range.
• Whether carry-to-vol in USD/CHF and EUR/CHF remains elevated, and whether the SNB's intervention bias changes.
• Canada-U.S. trade negotiations, BoC language, and the extent to which USD/CAD tracks rate differentials.
• Thailand's gold correlation, BoT policy, inflation, and THB/INR performance.
• Relative policy expectations for the RBNZ and RBA, and AUD/NZD sensitivity to rate differentials and commodity prices.
• Foreign flows into EGP local bonds, high-carry exposure in TRY/NGN/KZT, and geopolitical risks in the Middle East.