Spike in global rates spurs resurgence in currency carry trades

Interest in popular currency carry trade would increase as rapid rate hikes by major central banks around the world appear almost over amid concerns over growth.

What happened: A Bloomberg gauge to borrow dollars and put the funds in a basket of emerging currencies has seen gains of nearly 5% 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 a trade in which funds borrowed at a lower interest rate are deployed into higher yielding trades. assets to generate returns.

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

Seventeen of the 23 emerging market currencies tracked have posted positive returns so far this year, while the majority lost money last year, according to a Bloomberg report, citing data through Thursday .

For example, Brazil’s central bank began raising rates as early as March 2021 and raised rates by a combined 1,175 basis points to the current level of 13.75%. Its Selic rate offers a premium of 875 basis points over THE of the Federal Reserve reference – a significant cushion to offset any potential weakness in the Brazilian real, the report explains.

Expert opinion: Eimear DalyEmerging Markets Strategist at NatWest Markets Plc in London, told Bloomberg that against all odds, March’s bout of financial market volatility could be just the ticket to revive emerging market carry trades.

“Now that US carry is likely capped, investors will be tempted to return to high-carry emerging currencies, with significant carry supply,” Daly said.

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