Emerging Market Carry Traders Seem to Take No Notice of Rate Cuts

Latin America is expected to remain a powerhouse of currency returns for carry traders

Dollar banknotes in an FX shop in Colombia.
By Kerim Karakaya and Colleen Goko
July 03, 2023 | 10:57 AM

Bloomberg — Carry traders betting on emerging-market currencies have been racking up winnings this year.

A Bloomberg index that measures carry-trade returns from eight emerging markets, funded by short positions in the dollar, climbed 4.7% in the first half, and is now on track for the best yearly gain since 2017. Mexico’s peso has notched up carry-trade gains of 18%, while Hungary’s forint returned 15.4% and Brazil’s real 14%. The carry trade is a strategy that involves borrowing in countries with low interest rates to invest in higher-yielding assets and currencies.

Interest-rate differentials with the US have reached such a level that the start of monetary easing in countries such as Chile and Brazil in the next few months is likely to do little more than dent those returns, analysts at Barclays say. The gains will be aided by a slump in currency volatility, with a JPMorgan Chase & Co. index on expected price swings in developing nations dropping to the lowest since September 2021.

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“We expect these trends to continue throughout the summer,” Barclays analysts Bum Ki Son and Andreas Kolbe said in the note circulated on Friday. “Emerging-markets carry remains high, in particular in Latin America and Hungary, offering significant premia over core rates.”


Emerging-market currencies overall have retained their carry gains even as the Turkish lira slumped. The currency has posted a carry-trade loss of more than 14% in the past month alone as the government started to ease foreign-exchange controls.

It’s not only dollar-funded strategies that have been fruitful. Investors using the Japanese yen have outperformed those who borrowed in dollars in all developing markets, according to data compiled by Bloomberg.

Latin America

Latin America is expected to remain a powerhouse of currency returns for carry traders.


“We remain overweight in Mexico Peso and Colombian peso to benefit from high carry in a low-volatility environment,” said Citi strategists including Luis Costa and Dirk Willer.

Mexico’s ‘Super Peso’ Is No Longer the Most Attractive Carry Trade in LatAm

The slump in Turkey’s lira underlined that high rates alone are not enough to guarantee juicy returns. Currencies need good economic fundamentals and political stability behind them, said Eimear Daly at Natwest in an interview on Bloomberg TV.

“Carry is king. You cannot fight it,” Daly said. Still, “you have to be cognizant that we like high carry EM but with strong fundamentals, with low domestic political risk.”

If emerging-market currencies do weaken with the start of monetary easing, that could merely open up buying opportunities for investors, according to analysts at Nomura.

Brazil’s Sky-High Interest Rates Fuel World’s Best Carry Trade

Rate reductions may be “a rude awakening” for carry chasers, the bank’s analysts said. But declines could also “open up opportunities in some emerging-markets – we think particularly in EM Asia, parts of LatAm (Brazil and Mexico) and South Africa – but unmask vulnerabilities in other EMs, notably EEMEA,” they said, referring to Eastern Europe, the Middle East and Africa.

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