Carry trades take off again as EM currencies rally
Emerging market carry trades gain momentum. Currency volatility decreases amid signs of easing US tariffs. An index of carry returns reached a seven-year high in late May. Asset managers increased long positions in developing-nation currencies. The Mexican peso saw a nine-month high. JPMorgan Chase's gauge of global currency volatility dropped.
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Emerging market carry trades are taking off again, as currency volatility subsides amid signs US president Donald Trump's aggressive tariffs may not get fully enacted.An index of carry returns hit a seven-year high in late May.Asset managers have boosted long positions in developing-nation currencies in recent weeks, with those on Mexico's peso reaching a nine-month high, based on CME Group data.A gauge of global currency volatility compiled by JPMorgan Chase dropped to 8.7% on Friday from as high as 11% in early April. Pictet's Yigitbasioglu said his favorite carry-trade targets include the Chilean peso and South Korean won, which is likely to appreciate after the country elects a new president on June 3.The carry trade has been generating an increasing number of headlines recently in Asia. The Taiwan dollar surged in early May as gains in the currency led to a rush to exit positions using it as a funding currency.The Hong Kong dollar slid to the weak end of its trading band in late May as falling local interest rates led traders to use the currency as a funding vehicle.The outlook for further monetary-policy easing in China means the yuan too 'is becoming a very attractive funding currency,' said Ju Wang, head of Greater China foreign-exchange & rates strategy at BNP Paribas SA in Hong Kong.Moderating inflation in many emerging-market economies means that real yields on their bonds are relatively attractive. That's one reason why Brazil's real features high on the list of attractive longs at Goldman Sachs Group Inc., and ING Groep NV.Invesco Ltd. sees the current global environment as beneficial for carry trades, with its preferred funding currencies being the euro and the dollar.'There's probably some downside to euro until June, so I'm happy to use it as a funder for now,' said Wim Vandenhoeck, a senior portfolio manager at the firm in New York, referring to his tactical trade of going long the South African rand. He also has positions favoring the Brazilian real and Turkish lira funded in dollars, he said.One drawback of borrowing the dollar to fund carry trades is the fact US interest rates are relatively high. But the prospect of further dollar weakness means a number of high-yielding currencies in Latin America may perform well, according to RBC BlueBay Asset Management.'We think funding emerging-market longs out of US dollars is the most sensible at this point,' said Anthony Kettle, the firm's senior portfolio manager in London.
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