EM FX Carry Trade Update – September 13 2019

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.