There's Something About Carry

SnapStreet SignalsTim GrafSep 24

The episode examines whether yen-funded emerging-market currency carry trades have become vulnerable after years of strong returns and unusually subdued volatility. The host concludes that positioning does not appear extreme and sees no clear sign of an imminent unwind, but says low correlations among high-yielding currencies and favorable carry conditions make it difficult to expect conditions to improve further in the coming weeks.

Currencies Emerging Markets Market Volatility

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Key Points

The host defines an FX carry trade as borrowing or selling a low-interest-rate currency and investing the proceeds in a higher-yielding one to earn the interest-rate differential.

The host reports that the EM-only Bloomberg FX carry index returned 10% annualized over the past five years, with annualized volatility of around 9%.

The host says the past year's EM carry returns were about 10%, with volatility around 4% to 4.5% and a maximum drawdown of about 4%.

The host says yen positioning has eased from a large consensus short: real-money investors remain underweight, but speculative investors are now slightly long after the yen strengthened.

Yen-Funded Carry Risk

The host introduces subdued market volatility and asks whether yen-funded emerging-market carry trades, after strong risk-adjusted returns, are becoming vulnerable.

How FX Carry Pays

The host explains how carry earns interest-rate differentials, reviews its crash risk, and compares recent emerging-market carry returns and volatility with cash yields.

Carry Trade Positioning

Positioning data show some long exposure to high-yielding currencies, but yen and franc shorts have eased and overall investor positions do not look extreme.

Yen Reversal and Correlations

A future yen rebound remains a longer-term risk, while unusually low correlations among high-yielding currencies stand out as a reason to be cautious rather than evidence of an imminent unwind.

Carry Outlook and Closing

The host sees no clear near-term carry-trade blowup but says favorable returns, subdued volatility, and low correlations leave limited room for conditions to improve.