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Foreign Exchange

Goldman: carry trade currencies will outperform

Carry-based trading strategies are set to outperform as currencies based in high-interest rate countries offer better returns than their low interest rate counterparts, according to Goldman Sachs.

The firm’s carry current trade, which tracks the performance of high-yielding currencies versus low-yielding ones, will likely continue to outperform, says analyst Thomas Stolper. The trade captures the performance of long positions on Brazilian real, Hungarian forint, South African rand, Turkish lira, Indian rupee and Indonesian rupiah, against short positions on the Chinese yuan, Taiwanese dollar, Swiss franc, Japanese yen, Singapore dollar and US dollar.

After a large decline in late 2008, the carry current trade has strengthened by 10.1% since the beginning of 2009, and by 0.5 % this year.

“In the long run, the return on holding high carry currencies tends to outperform low carry currencies,” says Stolper. “However, at times of high risk aversion carry trades tend to post heavy losses.”

Despite positive returns on the carry trade in aggregate, investors should beware cases where the target currency looks overvalued, Stolper warns. For example in Turkey, where the current account deficit now exceeds 10%, external demand for lira-denominated assets is expected to fall.

Goldman also cut its dollar forecast, citing an unattractive growth outlook for the US compared with many other countries.

Goldman forecasts that the euro is likely to trade at $1.4500 in three months, up from the previously projected $1.4000 target. Goldman has also increased its six- and 12-month targets to $1.50 and $1.55 respectively, from $1.45 and $1.50. Currently the euro is trading at $1.4232.

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