In­vestors re­turn to carry trades

The Star Early Edition - - BUSINESS NEWS - Natasha Doff

THERE’S life in the great emerg­ing-mar­ket carry trade yet, al­though now it comes with a twist.

In­vestors are bet­ting a trade that reaped re­turns of more than 20 per­cent last year for bor­row­ing dol­lars to buy Brazil’s real, Rus­sia’s rou­ble and South Africa’s rand has fur­ther to run – only they are us­ing the bat­tered Bri­tish pound to fund long po­si­tions in emerg­ing-mar­ket cur­ren­cies. Cit­i­group on Mon­day named short­ing the pound against the Rus­sian rou­ble its top trade of the week.

The so-called carry trade, in which in­vestors bor­row in coun­tries with low rates to in­vest in higher-yield­ing as­sets, lost some of its ap­peal late last year as ris­ing US bor­row­ing costs bol­stered the green­back and Don­ald Trump’s elec­tion damp­ened ap­petite for risk.

Now the pound’s volatil­ity, sparked by the UK’s move to pull out of the sin­gle Euro­pean mar­ket, is mak­ing de­vel­op­ing mar­kets look like a rel­a­tively safe bet.

“Ster­ling is as volatile as any emerg­ing-mar­ket cur­rency at the mo­ment,” said Ben Ku­mar, the London-based in­vest­ment man­ager at Seven In­vest­ment Man­age­ment. “The cur­rency risk is much eas­ier to take than emerg­ing-mar­ket cur­ren­cies ver­sus the dol­lar.”

The pound’s wild swings have closely tracked every new piece of in­for­ma­tion on the Bri­tish gov­ern­ment’s Brexit plans.

The cur­rency plunged more than 1 per­cent on Mon­day, then surged more than 3 per­cent on Tues­day af­ter Prime Min­is­ter Theresa May said UK leg­is­la­tors would get a vote on the fi­nal deal for the na­tion’s exit from the EU.

The pound weak­ened 0.8 per­cent to 1.2313 dol­lars by 10.30am in London, tak­ing its de­cline in the past 12 months to 13.4 per­cent. A mea­sure of the pound’s price swings against the dol­lar in the past week climbed to 23.7 per­cent yesterday, the most af­ter Turkey’s lira among 16 ma­jor de­vel­ope­d­na­tion and emerg­ing-mar­ket cur­ren­cies. – Bloomberg

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