EM FX Carry Trade Update – September 13 2019
Head of FX Strategy, Saxo Bank Group
Summary: Carry trade performance has picked up strongly over the last couple of weeks as global risk conditions have improved, EM credit spreads have tightened and the US dollar has eased lower. Background conditions for EM carry trades have rarely been more complacent than they are currently.
The sharp improvement in risk conditions globally over the last few weeks has driven a strong performance for EM currencies since late August. However long it lasts, the current thaw in US-China trade tensions has helped, as has the market’s increasingly warm reception of central bank easing globally in recent. As well, after a strong signal from China in allowing the USDCNY to power above the psychological 7.00 level in early August, the slide in the CNY versus the USD was halted earlier this month and has partially reversed.
Chart: Saxo Bank Global Risk Indicator
Our Global Risk Indicator gives a clear indication of the general improvement in risk conditions, with tightening EM spreads contributing strongly to the improvement. The next key tests for EM arrive with next Wednesday’s FOMC meeting and policy guidance from the Powell Fed. The next and bigger test will be whether the US and China can get trade negotiations back on track or whether the relationship resumes the long-term worsening trajectory.
Carry trade performance*
Among the funding currencies, the JPY and the CHF began weakening recently on a sizeable backup in global bond yields over the last couple of weeks and are the only notable weaklings against the US dollar over the last month.
12-month carry trade versus performance
Over the last twelve months – which includes both a remarkable meltdown and then recovery in global markets, high carry currencies as a group have performed roughly along the line of more reward for the risk. This is more typical in rallying global risk sentiment rallies and at market tops than in the opposite conditions to be sure. Note that this particular chart gives a rough return estimate for general illustrative purposes only. Returns are shown versus the USD.
Current carry available*
The chart below simply shows the forward carry for owning the USD versus funding currencies and the returns on higher yielding EM currencies versus the US dollar. The forward carry available has dropped for a number of pairs - most impressively the Turkish central bank this week chopped the one-week repo rate by 325 bps to 16.5%.
*Note that all performance calculations are done as carefully as possible to include trade spread costs and market conditions at the time but actual results will inevitably vary depending on the timing of rolling forward positions and other factors.
Latest Market Insights
Quarterly Outlook Q2 2022: The End Game has arrived
- Shocks from covid and the war in Ukraine have forced the global financial and political world to change, but what will the end game be?
Productivity and innovation have never been more importantAs the world economy hits physical limits and central banks tighten their belts, could equities be facing a 10-15% downside?
The great EUR recovery and the difficulty of trading itIf the terrible fog of war hopefully lifts soon, the conditions are promising for the euro to reprice significantly higher.
Tight commodity markets – turbocharged by war and sanctionsWith supply already tight, commodities keep powering on. But will it last for yet another quarter?
Between a rock and a hard placeGeopolitical concerns will add upward price pressures and fears of slower growth, while volatility will remain elevated.
The Great ErosionInflation is everywhere and central banks try to combat it. But will they get it under control in time?
Australian investing: Six considerations amid triple Rs: rising rates, record inflation and likely recessionWhile global financial markets are struggling in an uncertain world, the commodity-heavy Australian ASX index is poised to keep a positive momentum.
Cybersecurity – the rush to catch up with realityWith the invasion of Ukraine, governments and private companies are rushing to reinforce their cyber defenses.
Please read our disclaimers:
- Notification on Non-Independent Investment Research (https://www.home.saxo/legal/niird/notification)
- Full disclaimer (https://www.home.saxo/en-gb/legal/disclaimer/saxo-disclaimer)