Carry Trades With Emerging FX Are Entering Bearish Momentum

LAGOS (Capital Markets in Africa) – Emerging-market carry trades are losing their appeal and they could be in for more losses, if technical indicators are any guide.

A Bloomberg gauge of carry trades in eight developing-nation currencies declined 1.7 percent since reaching the most since August 2014 on Jan. 25 amid the latest market turmoil that sent volatility to the highest level since 2015 this week. The carry-trade measure fell below the 21-day moving average on Wednesday. At the same time slow stochastics show that bearish momentum is gaining traction.

“The chart signals that traders aren’t going to be bullish on carry trades in the very near term and are likely to see some profit-taking pressure,” Tsutomu Soma, general manager of SBI Securities Co.’s Independent Financial Advisor department in Tokyo, said. “Having said that, it doesn’t necessarily indicate that the long-term uptrend will suddenly change significantly; I don’t see any meltdown coming.”

The carry-trade index, which measures the cumulative total return of a buy-and-hold carry trade position that is long eight emerging market currencies — Brazilian real, Mexican peso, Indian rupee, Indonesian rupiah, South African rand, Turkish lira, Hungarian forint, Polish zloty — has handed investors a return of more than 13 percent since the end of 2016.

Source: Bloomberg Business News