Source: Bloomberg, Unigestion. Implied percentage carry change using 12-mth FX forward points vs. the USD (4th of January 2021 vs 26th of October 2021).
The interest rate differential between two countries and their expected monetary policy path (tightening or easing) are typically reflected in foreign exchange forward points, resulting in either a cost or a credit when holding a currency pair. With many emerging market central banks having started their rate hike cycle, the carry element is now becoming an important driver for their currencies. Some currency pairs, initially used as funding currencies or beta/geopolitical hedges, have now seen that cost increase significantly, making them expensive shorts to hold. With volatility having increased over the last 18 months and only now starting to ease, the carry element is one positive factor that has increased the risk/reward of being long emerging market currencies, giving investors an extra cushion.
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