Carry Trades: Vulnerability & rotation - TDS

Analysts at TDS suggest that the underperformance of EM assets in recent years has created an opportunity to position for an extension of the rebound seen in EM FX in 2016.

Key Quotes

“At the root of the EM FX underperformance in recent years is the shrinking ‘growth premium’ of EMs, but this should improve going forward supported by a pick-up in commodity prices, manageable Fed hikes, and the still attractive EM FX carry.”

“With G10 carry opportunities non-existent amid aggressive central bank easing, DM currencies are relegated to the role of funding vehicles. Here, we think an optimal strategy focuses on rotating from a reliance on EUR as the funding currency of choice in early 2017 to a focus on the USD and JPY later as we expect these currencies to peak in H1.”

“Market: We take a long position on a basket of select high-carry currencies (BRL, INR and IDR) funded in EUR, with an annualized carry of 11.15%.”