Citigroup sees carry trade offering opportunities amid softer U.S. dollar outlook
High interest rates across emerging markets continue to support demand for carry trades, even as returns may not match an earlier period of standout performance. Citigroup's U.S. currency desk also expects the dollar to weaken slightly after Federal Reserve officials decide against an interest-rate hike last week.
Highlights
- Citigroup's U.S. FX desk asserts that elevated emerging-market rates continue to support gains for carry trade strategies in the current environment.
- Fuad Muvdi, head of U.S. FX trading, notes that while strong gains may moderate, the carry trade remains attractive for investors borrowing in low-yielding currencies.
- Citigroup expects the U.S. dollar to weaken slightly after the Federal Reserve held interest rates steady last week, bolstering potential returns for high-yield currency trades.
Emerging-market yields underpin strategy
As reported by Bloomberg, Citigroup's U.S. foreign-exchange desk says the carry trade still offers investors room for gains because borrowing in low-yielding currencies and investing in higher-yielding ones remains attractive in the current rate environment.Fuad Muvdi, head of U.S. FX trading at the bank, says the strategy continues to benefit from elevated interest rates in emerging markets, although it may struggle to repeat a previous stretch of especially strong returns.
Dollar outlook shapes investor positioning
The bank also expects the U.S. dollar to weaken slightly, a view that could reinforce interest in carry positions if higher-yielding currencies become more attractive on a relative basis.That outlook follows the Federal Reserve's decision last week not to raise interest rates, a move that Citi's desk sees as part of the backdrop for foreign-exchange investors weighing risk, yield and currency performance.
In our earlier report on sovereign resilience in a higher-rate environment, we noted that sustained geopolitical shocks and elevated public spending are keeping borrowing risks high as global funding costs remain elevated. We also highlighted that emerging and frontier markets are especially exposed because their interest-service burdens are often heavy relative to limited revenue bases, with inflation pressures further complicating credit outlooks.
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