EM carry traders have worst August on record

Bloomberg currency index has slumped more than 5% since end-July

August has historically been a cruel month for emerging markets. By one measure, this year’s has been the worst on record.

A Bloomberg currency index that tracks carry-trade returns from eight emerging markets, funded by short positions in the dollar, has slumped more than 5 per cent since end-July, set for its biggest August drop since Bloomberg started compiling the data in 1999.

Dollar surge

While a hawkish Federal Reserve boosted the dollar to a 14-month high this month, currency crises from Turkey to Argentina and China’s trade war with the US dented demand for riskier assets. Turkey’s lira, Argentina’s peso, Brazil’s real and Russia’s rouble were the hardest hit developing-nation units, cutting returns for speculators who borrow in a currency they expect to depreciate or remain little changed to secure the lowest borrowing costs, and using the proceeds to buy assets with higher yields.

August has often seen violent moves as many market participants leave for their summer vacation. As the ability to buy and sell assets declines with thin trading, market shocks can lead to exaggerated price swings. Often, policymakers are also out of play, which means investors won’t have the policy response they would expect at other times of the year, said Richard Segal, senior analyst at Manulife Asset Management Ltd. in London.

“This year, weakness in Turkey and Argentina is feeding off each other,” Segal said.