Emerging carry trade markets “dead” by a strong dollar

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(Bloomberg) – The stronger dollar is reducing the appeal of carry trades in emerging market currencies, which has caused investors the biggest monthly loss in 18 months.

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An index that measures the performance of borrowing in dollars and investing funds in eight high-yielding currencies, such as the Turkish lira, the Brazilian real and the Indonesian rupiah, fell 3.3% in September, the highest since March 2020. The Bloomberg Cumulative FX Carry Trade Index accumulates a loss of 1.2% in the year.

First-half profits evaporated as investors sought dollar security amid the debt crisis of Chinese real estate giant Evergrande Group, and because the looming reduction in asset purchases by the Federal Reserve prompted the US bond yields will resume their ascent. Of the 24 developing country currencies Bloomberg analyzed, 16 appreciated on Friday, while the dollar fell for a second day.

“Buying all of the high yield emerging markets against the dollar is dead,” said Lars Merklin, senior analyst at Danske Bank A / S in Copenhagen. “The strength of the dollar will be very persistent.” The expert prefers an alternative funding currency like the euro, which fell above 1.16 per dollar this week for the first time since July 2020.

Emerging market currencies such as the Russian ruble, whose initial yields have already risen thanks to preemptive monetary tightening by central banks, are likely to fare better against a stronger dollar, said Peter Kinsella, global head of strategy. changes in London. of Union Bancaire Privée.

“The euro should be a preferred cyclical funding currency, given its negative rate profile and high beta for slowing global growth,” Kinsella said.

Note Original: Bets on emerging markets are declared “dead” on the strong dollar (1)

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