Carry Trades Resurge as Emerging Market Currencies Soar

The revival of carry trades in emerging markets is gaining momentum as currency volatility subsides, particularly after signals that President Donald Trump’s aggressive tariffs may not be fully enacted.

Read: High-yielding bonds in EM are poised to outperform as treasury yields fall

Recently, asset managers have expanded their long positions in emerging market currencies, with Mexico’s peso reaching a nine-month peak, according to data from CME Group Inc.

“Currently, carry trades present a solid strategy,” remarked Ali Bora Yigitbasioglu, a senior investment manager for fixed income at Pictet Asset Management in London. He noted that with the White House easing some of its confrontational trade policies, “the carry currencies are likely to benefit significantly.”

The carry trade strategy, most effective in periods of low volatility, gained traction around 2020, largely financed by the ultra-low-yielding yen. However, these trades faced rapid changes in August when the Bank of Japan’s interest rate increase caused a spike in currency values.

Recent reductions in global trade tensions have sparked renewed interest in carry trades.

A measure of global currency volatility developed by JPMorgan Chase & Co fell to 8.7% on Friday, down from nearly 11% earlier in April.

Yigitbasioglu from Pictet highlighted that his favored carry-trade targets include the Chilean peso and the South Korean won, which is anticipated to strengthen following the upcoming presidential election on June 3.

Carry trades have gained significant traction in Asia. The Taiwan dollar appreciated in early May, enticing traders to exit positions that utilized it as a funding currency. In contrast, the Hong Kong dollar weakened towards the lower end of its trading range in late May as decreasing local interest rates prompted traders to adopt it as a funding source.

The expected easing of monetary policy in China implies that the yuan is becoming “an increasingly appealing funding currency,” noted Ju Wang, head of Greater China foreign-exchange & rates strategy at BNP Paribas SA in Hong Kong.

With inflation receding in numerous emerging markets, the real yields on their bonds look quite attractive.

Read: Kganyago remarks spark best bond return in EM

This is one of the reasons why Brazil’s real is prominently featured on the attractive long positions list at Goldman Sachs Group Inc. and ING Groep NV.

Invesco Ltd. perceives the current global context as favorable for carry trades, with their preferred funding currencies being the euro and the dollar.

“There’s likely to be some downside risk to the euro before June, so I’m comfortable using it as a funding option for the time being,” stated Wim Vandenhoeck, a senior portfolio manager at the firm in New York, while outlining his strategy of investing long in the South African rand.

He also maintains positions favoring the Brazilian real and Turkish lira financed in dollars.

A noted disadvantage of utilizing the dollar for funding carry trades is the comparatively high U.S. interest rates. Nevertheless, the potential for further dollar weakness may enhance several high-yielding currencies in Latin America, according to RBC BlueBay Asset Management.

“We think that funding emerging market long positions with U.S. dollars is the most sensible strategy at present,” remarked Anthony Kettle, the firm’s senior portfolio manager in London.

Key events to watch this week:

• June 2: Hungary GDP; South Africa GDP; China Caixin manufacturing PMI
• June 3: South Koreans elect a new president following Yoon Suk-yeol’s ousting amid military governance
• June 4: Poland rate decision; South Korea GDP, CPI
• June 5: Brazil trade data; China Caixin services PMI; CPI data for Taiwan, Thailand, and the Philippines
• June 6: Rate decisions in India and Russia; Chile CPI

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