February 14, 2021
Playbooks for emerging-market carry trades are changing as favored funding currencies gear up for gains, threatening to eat into investors returns.
The European Central Bank made a pivot this month and will likely deliver its first rate increase in more than a decade sometime in 2022. Thats driving fresh strength in the euro, which has long been a favorite funding currency. Meanwhile, growing expectations that the Federal Reserve will have to lift interest rates as many as seven times this year to control soaring consumer prices is putting fire in the belly of the dollar. Even the yen has rallied off tension between Russia and Ukraine, which deepenedon Friday.
The result is that carry traders — who borrow low-yielding tenders to buy higher-yielding ones — may turn away from the currencies, leaving them with an ever-narrowing set of funding choices. The strategy has started to recover after two-straight years of declines for an index tracking dollar-funded investments in eight major emerging markets. Yet the jump in borrowing costs across much of the developed world is only going to make the job of maximizing returns tougher.
OneProSpecial Analyst
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