Commodity Currencies and the Return of Carry

The market, as it so often does, has shown a certain genius for fixating on the immediate inconvenience while sidestepping the larger development. In the weeks since the fragile ceasefire, attention has remained trained on the Strait of Hormuz: When will tankers resume normal passage, how quickly can Gulf production recover, and when might insurance and freight costs stop making LNG cargoes cost less than a luxury cruise?

All perfectly reasonable near-term questions, but they are also, I believe, the wrong ones.

While we reiterate our skepticism about a “Goldilocks” solution to the mess in the Persian Gulf, what is unfolding is not what we believe is simply another Middle Eastern disruption to be filed away under “geopolitical noise” and forgotten once spot prices calm down. It is, in our view, an acceleration of a structural rebalancing already underway in the global energy system. The geography of reliable supply, the direction of capital flows, and the currencies financing both are shifting—not neatly, and certainly not overnight, but in a way that increasingly favors the “Atlantic basin.”

That does not make the Gulf irrelevant. Far from it. The region remains critical to global energy and trade. But persistent questions around shipping security, insurance, and counterparty exposure—compounded by Iran’s domestic fragilities—have sharpened the case for diversification for Europe and Asia.

There is a second dimension here that I believe oil headlines tend to obscure. A recent Financial Times piece by Adam Hanieh usefully noted the Gulf’s deep integration into the global food system through ammonia, urea, sulphur, and related chemical inputs essential to modern agriculture. That matters because disruptions in the Gulf do not stop at crude prices. They can transmit into fertilizer costs, farm input inflation, and food security pressures, particularly in already vulnerable parts of Africa and Asia. Add in the importance of Gulf logistics hubs such as Jebel Ali, and the scope for wider ripple effects becomes rather harder to dismiss as background noise.

None of this requires melodrama. Brent has already come off its highs, and markets are doing what they usually do after a scare: reassuring themselves that normality is only slightly delayed. But the more important point is that repeated uncertainty around Gulf energy and fertilizer flows raises the premium on resilient, politically steadier, and geographically proximate alternatives. That is where we believe the Atlantic rebalancing becomes relevant.

The beneficiaries are not difficult for us to identify. For Europe the flexibility of US and Canadian energy, Brazil’s pre-salt developments, expanding production in Guyana, Argentina’s Vaca Muerta supported by improved export infrastructure, West African LNG growth, and the steadier contribution of the Norwegian and UK North Sea all point in the same direction. These are not perfect substitutes for Gulf supply, nor need they be. They are additional sources of supply with fewer strategic chokepoints and, for Europe and the Americas in particular, a more attractive risk profile.

That has implications beyond energy equities. It also helps revive a more grounded version of the commodity–currency carry trade, particularly in parts of Latin America. Brazil’s Selic rate, even after recent easing, remains high at 14.75%. Colombia’s policy rate is 11.25%, and Mexico’s is 6.75%. Those figures matter not simply because yield is once again visible, but because in several cases it sits alongside terms-of-trade support and exposure to a broader shift in commodity and capital flows. Latin America is not the thesis in itself; it is, in our view, for the moment, one of the clearer expressions of it.

Markets tend to treat carry as a regrettable lapse in discipline until it starts working, at which point it becomes a strategy again. The distinction this time is that the case is not merely about chasing nominal yield. Where commodity-linked economies are benefiting from stronger external balances, more durable export demand, and relatively high real yields, selected currency exposure can offer both income and a degree of inflation resilience. That does not remove the familiar risks—dollar strength, domestic politics, policy missteps, and commodity volatility remain perfectly capable of spoiling the party—but it does make the opportunity more substantive than a simple reach for yield.

For US investors and advisors building multi-asset portfolios, the implications are practical enough. Energy exposures that assume a swift return to Gulf normality still look, using British understatement, “somewhat optimistic.”  Tactical dislocations are one thing; a gradual redrawing of the map is another. We think structural demand for diversification should continue to support selected North American LNG, Atlantic-basin upstream assets, and related infrastructure. Selective exposure to commodity-linked currencies—whether through FX, local markets, credit, or equities with strong local-currency leverage—may offer both carry and a partial hedge against persistent inflation risks. In fixed income, we think the backdrop still argues for caution on duration, while TIPS and selective curve steepener positions retain their usefulness in a world where energy and food-related price shocks may prove less transitory than central bankers would no doubt prefer.

Structural changes rarely arrive with fanfare. More often, they present themselves as temporary interruptions, to be explained away until the evidence becomes too obvious to ignore. This looks rather like one of those moments to us. Not the collapse of the old order, which is usually announced far too early, but a steady reweighting of where reliable supply, capital investment, and ultimately returns are likely to gather.

The challenge, as ever, is to distinguish between what is merely noisy and what is actually changing.

Disclosure: This material is for informational purposes only and should not be considered investment advice. An investor should consult with their financial professional before making any investment decisions. The opinions contained herein are subject to change without notice and do not necessarily reflect the opinions of Rayliant Investment Research. Indices cannot be invested in directly and are unmanaged.