FX: Mixed outlook for carry trades as markets read the runes on rates
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Foreign Exchange

FX: Mixed outlook for carry trades as markets read the runes on rates

Carry traders are going to have to work hard to maintain the momentum of the last few months if expectations of interest rate cuts in the US and hikes in Japan come to pass.


It has been a good year for carry trades. Low FX market volatility – MUFG’s G10 FX implied volatility index is at its lowest level since January 2022 – is one positive factor. Others are stubbornly high inflation in the UK that is preventing the Bank of England from cutting borrowing costs, and the recent weakness of popular carry trade currencies such as the yen and Swiss franc.

Although markets are pricing in three rate cuts in the US this year, and at least one by the Bank of Japan – which would wipe about 100 basis points off the carry – the strategy will remain profitable for 2024, according to Russell Shor, senior market specialist at Tradu.

Simon Harvey, head of FX analysis at Monex, is more circumspect, noting that the carry trade has only been profitable on a select number of expressions this year. He notes that aggregate indicators – such as long emerging market local bonds indices and long emerging market high yield baskets – have actually produced negative returns so far this year once swings in the underlying currencies are accounted for.

“We think the carry trade has a limited shelf life this year,” he says.

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