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A cautious shift from global central banks is sending investors hunting
for big paydays in emerging-market currencies, despite concerns that
global growth may continue to slow.
Many are employing a strategy known as the carry trade,
in which an investor borrows in a low-yielding currency to roll the
funds into a higher-yielding emerging-market asset, such as local bonds,
and pockets the difference.
Emerging markets are a popular target for carry traders because
they often offer yields that are much higher than those found in
For example, Turkey’s three-month deposit rate, which traders use to
calculate returns on carry trades, stood at 28% on Friday, while
Russia’s was at 7.9%. The analogous rate in the U.S. is at around 2.6%.
An investor borrowing in dollars and buying Turkish assets hopes to
collect a yield of more than 25% over three months, without accounting
for moves in the underlying currencies and transaction costs.
The trade’s popularity is another example of how recent signals
from the world’s biggest central banks have encouraged investors to
embrace riskier strategies.
Expectations that interest rates are unlikely to rise
have made high-yielding emerging-market currencies more appealing.
Meanwhile, a calm stretch in markets has allowed investors to collect
yield without worrying about losing gains to unfavorable currency
Carry trades can backfire if markets turn rough, though, sometimes
erasing weeks of gains in a single trading session. The Turkish lira
dropped during a bout of investor jitters last month, although it has
recovered some of its losses. Argentina’s high yields have been undercut
by its steadily falling peso.
Many carry traders are watching for signs that growth is continuing to ebb
despite central bankers’ efforts to contain the slowdown, a development
that would likely push many to lower positions in riskier assets.
So far, the signals have been mixed: manufacturing data for
China and the U.S. improved in March and U.S. hiring bounced back after a
weak showing in February.
A separate risk is a rebound in U.S. economic performance that bolsters
the case for the Fed to tighten monetary policy again. Higher interest
rates tend to dent the allure of emerging-market assets, while also
making it harder for countries with dollar-denominated debt to service
“For emerging markets, the sweet spot is somewhere in the middle,” said
Ed Al-Hussainy, senior interest rate and currency analyst at Columbia
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Friday, its best two-week stretch since mid-January. The benchmark is on
a seven-day winning streak, its longest such run since October 2017,
when it rose for eight consecutive days.
U.S. crude oil climbed for the fifth consecutive week last week, its
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FedEx Corp. is among corporations that has recently cut their full-year
profit forecasts as a result of challenging market conditions. PHOTO:
CHRISTOPHER LEE/BLOOMBERG NEWS
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Shares of the energy company rose 3.7% Friday to their highest level in
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Urban Outfitters: Shares of the retailer have climbed in 10 consecutive sessions, the longest such streak since November 2017.
Tesla: The electric auto maker’s board of directors reviewed allegations
that CEO Elon Musk pushed a former senior leader at the company in a
heated confrontation after the employee had resigned, Bloomberg
reported. Tesla’s board concluded there wasn’t a “physical altercation”
and didn’t address the allegations of physical contact or verbal abuse,
the report said.