Currency Carry Trades Regain Popularity As Global Rates Seemingly Hit Their Peaks: Here's What It Means

Interest in the popular currency carry trade is reportedly increasing as rapid rate hikes by major central banks around the world appear to be almost over amid concerns over growth.

What Happened: A Bloomberg gauge of borrowing dollars and putting the funds into a basket of emerging currencies recorded almost 5% gains this year — rebounding from three years of losses and hitting the highest since 2021.

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A carry trade can be defined as one where funds borrowed at a lower interest rate are deployed in higher-yielding assets to generate returns.

Dollar-funded trades with money infused into the currencies of Hungary, Colombia and Mexico have all registered more than 6% gains this year, according to data compiled by Bloomberg.

Seventeen of 23 tracked emerging-market currencies registered a positive return so far this year, while the majority lost money last year, a Bloomberg report said, citing data through Thursday.

For instance, Brazil's central bank started hiking rates as long ago as March 2021, and raised rates by a combined 1,175 basis points to the current level of 13.75%. Its Selic rate provides a premium of 875 basis points over the Federal Reserve's benchmark — a significant cushion to offset any potential weakness in the Brazilian real, the report explained.

Expert Take: Eimear Daly, an emerging-market strategist at NatWest Markets Plc in London, told Bloomberg that counter-intuitively, March's bout of financial market volatility could be just the ticket for reigniting EM carry trades.

"Now that U.S. carry is likely capped, investors will be tempted back in to EM high-carry currencies, with significant carry on offer," Daly said.

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Posted In: Macro Economic EventsNewsForexEconomicsFederal ReserveMarketsBrazilian realCurrency Carry TradesdollarRate Hikes
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