While the emerging-market carry trade returned just 0.5% in the first half, Bloomberg’s EM Carry Index is already up almost 2% since the end of July, with high-yielding but volatile currencies such as Turkey’s lira and South Africa’s rand leading the charge.
The decoupling of tapering from rates has also given a new lease of life to the currencies of early hikers like Brazil and Russia, whose outperformance had been starting to wane following aggressive gains this year. The ruble and real have been among the top performers in emerging markets since Powell’s Jackson Hole speech on Aug. 27, which gave policy makers room to react to economic fundamentals rather than second-guessing the Fed.
As the carry trade roars back, investors may find yields in countries such as South Africa, Brazil and Turkey too juicy to resist, bolstering their currencies, said Michel Vernier, head of fixed-income strategy at Barclays Private Bank. Export- and commodities-linked currencies are also expected to get a boost.
Malaysia’s central bank is likely to keep its benchmark interest rate at a record-low 1.75% on Thursday to support the economic recovery, according to a Bloomberg survey. Bank Negara Malaysia incut its 2021 economic growth forecast to 3%-4%. The Malaysian ringgit climbed to the highest in over two months on Monday
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