EM FX Carry Trade Update - January 31, 2020 EM FX Carry Trade Update - January 31, 2020 EM FX Carry Trade Update - January 31, 2020

EM FX Carry Trade Update - January 31, 2020

Forex 5 minutes to read
John Hardy

Head of FX Strategy

Summary:  The coronavirus outbreak has brought a broad setback for EM currencies, and especially those currencies exposed to commodities like copper and iron ore that have been heavily sold on fears of extended supply disruptions and demand from China. We continue to urge a very defensive stance on EM currency exposure.

The EM currency space has stumbled badly on the outbreak of the coronavirus in China, which has impacted risk appetite, but many select commodities even more so since the story picked up attention in the market starting less than two weeks ago (using copper as our benchmark – and even if it feels like this story has been driving the narrative for even longer). We really don’t know where this situation will take us, but the issue is the most important one in the driver’s seat until it is firmly behind us. On that note, a couple of points are foremost in our mind.

Coming into this virus outbreak, the EM complex and financial conditions could not have been more complacent, suggesting rather significant risk that significantly more volatility awaits if the concerns and fallout from the issue worsens. Secondly, conditions themselves, especially emerging market credit spreads (still near post-GFC tightness), are only beginning to show a bit of concern here and there, even as select commodity prices are flashing deep red -  so again, the market has mostly downshifted from extreme levels of complacency and isn’t yet showing any pronounced risk aversion. On that note, we upgrade our concern level for now and urge a very defensive stance on EM-related risk.

YTD EM Carry trade performance in 2020.

Below is a snapshot from a Bloomberg tool for measuring FX carry performance, a snapshot we will release with every update this year for a sense of how carry trades have performed in broad terms. Of course, the given basket here is for the most liquid of the higher yielding EM currencies and is more than a bit light on China-exposure, the most important theme of the moment. Still, our other performance snapshots below should give an idea of what themes are out- and underperforming.

For this basket, we chose the four highest yielding of the more liquid emerging market currencies at the beginning of the year versus the four lowest yielding G10 currencies. This basket returned nearly 15% in 2019 due to that year starting at a very low point for global risk appetite. After a strong start to 2020 on an extremely supportive backdrop in financial conditions, today is seeing the basket turn negative (-0.7% as per the blue line) on the year. Note that we used the MSCI EM equity index in USD terms as the benchmark – a benchmark that looks high beta in return terms relative to the basket so far this year.

Source: Bloomberg

Short term EM currency performance
The below shows the 1-week and 1-month carry-adjusted performance of the EM currencies in our universe and really paints a picture of how deeply EM currencies  have corrected here in the short term, with commodity currencies like the Chilean peso (often considered a copper proxy) most heavily affected, as well as many of the China-exposed exporting economies’ currencies, from Malaysia to Singapore and Korea.

Source: Bloomberg and Saxo Group

Chart: Saxo Bank Global Risk Indicator
As noted above, risk conditions have mostly simply mean reverted here and are still rather far from flashing red – especially in the case of emerging market credit spreads. Given how badly EM currencies have stumbled merely on some mean reversion, we hasten to warn that performance can deteriorate much more sharply if our risk indicator plunges deeply into the red in coming days/weeks.

Source: Bloomberg and Saxo Group

Carry trade performance*
The chart below shows the longer term performance of the US dollar versus the lowest yielding funding currencies. The performance of funding currencies has picked up solidly over the last couple of weeks with the exception of the more cyclically-inclined SEK as traders are likely unwinding some of their EM longs against these currencies as well as against the US dollar.

Source: Bloomberg and Saxo Group

EM currency performance continues to vary widely in the longer term, and the shorter term performance is more interesting above due to the very recent advent of the coronavirus effect in market returns, but still note in the graphic below the contrast in many cases between weak 1-month returns relative to the longer term performance. Russian ruble and South African rand traders have been administered quite a dose of whiplash over the last few weeks.

Source: Bloomberg and Saxo Group

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. Given the very poor performance of EM currencies on the coronavirus outbreak, we doubt that some of the projected interest rate cuts that were recently expected from EM central banks, including in Brazil and Russia, will come to see the light of day.

Source: Bloomberg and Saxo Group

*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.


The Saxo Group entities each provide execution-only service, and access to analysis permitting a person to view and/or use content available on or via the website is not intended to and does not change or expand on this. Such access and use are at all times subject to (i) The Terms of Use; (ii) Full Disclaimer; (iii) The Risk Warning; (iv) the Inspiration Disclaimer and (v) Notices applying to Trade Inspiration, Saxo News & Research and/or its content in addition (where relevant) to the terms governing the use of hyperlinks on the website of a member of the Saxo Group by which access to Saxo News & Research is gained. Such content is therefore provided as no more than information. In particular, no advice is intended to be provided or to be relied on as provided nor endorsed by any Saxo Group entity; nor is it to be construed as solicitation or an incentive provided to subscribe for or sell or purchase any financial instrument. All trading or investments you make must be pursuant to your own unprompted and informed self-directed decision. As such no Saxo Group entity will have or be liable for any losses that you may sustain as a result of any investment decision made in reliance on information which is available on Saxo News & Research or as a result of the use of the Saxo News & Research. Orders given and trades effected are deemed intended to be given or effected for the account of the customer with the Saxo Group entity operating in the jurisdiction in which the customer resides and/or with whom the customer opened and maintains his/her trading account. Saxo News & Research does not contain (and should not be construed as containing) financial, investment, tax or trading advice or advice of any sort offered, recommended or endorsed by Saxo Group and should not be construed as a record of our trading prices, or as an offer, incentive or solicitation for the subscription, sale or purchase in any financial instrument. To the extent that any content is construed as investment research, you must note and accept that the content was not intended to and has not been prepared in accordance with legal requirements designed to promote the independence of investment research and as such, would be considered as a marketing communication under relevant laws.

Please read our disclaimers:
Notification on Non-Independent Investment Research (https://www.home.saxo/legal/niird/notification)
Full disclaimer (https://www.home.saxo/en-sg/legal/disclaimer/saxo-disclaimer)

None of the information contained here constitutes an offer to purchase or sell a financial instrument, or to make any investments. Saxo Markets does not take into account your personal investment objectives or financial situation and makes no representation and assumes no liability as to the accuracy or completeness of the information nor for any loss arising from any investment made in reliance of this presentation. Any opinions made are subject to change and may be personal to the author. These may not necessarily reflect the opinion of Saxo Markets or its affiliates.

Saxo Markets
88 Market Street
CapitaSpring #31-01
Singapore 048948

Contact Saxo

Select region


Saxo Capital Markets Pte Ltd ('Saxo Markets') is a company authorised and regulated by the Monetary Authority of Singapore (MAS) [Co. Reg. No.: 200601141M ] and is a wholly owned subsidiary of Saxo Bank A/S, headquartered in Denmark. Please refer to our General Business Terms & Risk Warning to consider whether acquiring or continuing to hold financial products is suitable for you, prior to opening an account and investing in a financial product.

Trading in financial instruments carries various risks, and is not suitable for all investors. Please seek expert advice, and always ensure that you fully understand these risks before trading. Trading in leveraged products such as Margin FX products may result in your losses exceeding your initial deposits. Saxo Markets does not provide financial advice, any information available on this website is ‘general’ in nature and for informational purposes only. Saxo Markets does not take into account an individual’s needs, objectives or financial situation.

The Saxo trading platform has received numerous awards and recognition. For details of these awards and information on awards visit www.home.saxo/en-sg/about-us/awards.

The information or the products and services referred to on this website may be accessed worldwide, however is only intended for distribution to and use by recipients located in countries where such use does not constitute a violation of applicable legislation or regulations. Products and Services offered on this website are not intended for residents of the United States, Malaysia and Japan. Please click here to view our full disclaimer.

This advertisement has not been reviewed by the Monetary Authority of Singapore.

Apple and the Apple logo are trademarks of Apple Inc, registered in the US and other countries and regions. App Store is a service mark of Apple Inc. Google Play and the Google Play logo are trademarks of Google LLC.