Citigroup Inc.'s US currency desk expects the carry trade to keep offering opportunities for investors, even though the strategy may struggle to repeat a period of standout returns. The wagers, which involve borrowing in low-yielding currencies to invest where returns are higher, will continue to benefit from lofty interest rates in emerging markets, said Fuad Muvdi, head of FX trading for the Americas at the bank. He expects the dollar to weaken slightly after Federal Reserve officials opted against an interest-rate hike last week.
Citi remains positive on the Colombian peso, Brazilian real and Argentine peso against the dollar. But it's unlikely that the strategy can beat the strong returns of recent years, he said. "I'm still a believer in carry strategies," Muvdi said in an interview at Citi's global headquarters in New York. "Would I be putting all my risk behind it today? No, I don't think so."
Citi's bonds, currencies and commodities desk reported its best third quarter in at least a decade, reeling in $4.4 billion in revenue, with strong volumes in FX offsetting softer performance in rates. A carry trade consisting of long Colombian peso and short US dollar bets has returned about 26% so far this year, according to Bloomberg data. Similar bets on the Argentine peso and Brazilian real would have returned more than 14% and about 8.5%, respectively.
The potential for further hikes in certain nations, however, could narrow the gap between low- and high-yielding currencies, dimming the carry trade's returns. Muvdi pointed to the risk that persistent US inflation shifts the US rates outlook more aggressively. Brazil remains one of the markets where he sees scope for gains, with local rates around 15%. Mexico is one place where Citi is seeing investors take some "chips off the table." "With so much noise in the market currently, investors need to remain mindful of local market-specific factors instead of treating this as a set-and-forget trade."
Source: Bloomberg Markets · Summarized by HeadlinesBriefing