Carry-Trade Losses Smash Records Amid Mad Dash Into Dollars
Panic Buying Sees Dollar Soar Versus Emerging-Market Currencies
(Bloomberg) -- Emerging-market carry trades are hurtling toward the biggest quarterly loss in at least two decades as the coronavirus fuels a wild rush into the world’s reserve currency.
Returns on trades in which investors borrow in dollars to invest in developing-nation currencies have slumped 13% so far this year, the most since at least 1999, according to data compiled by Bloomberg.
With S&P Global Ratings raising its forecast for virus-driven economic losses in Asia Pacific to $620 billion, carry-trade losses are set to mount. The outlook is little better elsewhere, with losses mounting for other carry-trade favorites such as the Mexican peso, the Turkish lira and South African rand.
“This is not the time to play carry trades,” said Masafumi Yamamoto, chief currency strategist at Mizuho Securities Co. in Tokyo. “Key for carry trades to thrive is volatility remaining low. The world has changed and it’s difficult to expect a revival in carry trades.”
The insatiable demand for dollars shows little sign of ending as funds bet that the coronavirus pandemic will be longer and more damaging than first thought.
Carry trades were among the earliest casualties as volatility spiked in 2020, with every developing Asian nation’s currency suffering carry losses against the dollar this year.
Indonesia’s growth-sensitive rupiah has been hammered the most, plunging 16%.
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The slump marks a violent U-turn from 2019, when multi-decade low currency volatility made carry trades the darling of investors seeking to buttress ultra-low bond yields.
As emerging-market central banks now slash rates and even roll out quantitative easing measures, carry trades are likely “going on extended sick leave,” according to Khoon Goh, a strategist at Australia and New Zealand Banking Group Ltd.
“When volatility spikes, any gains from yield advantage evaporates due to FX losses,” he said. “With liquidity at a premium and there is strong demand for dollars, Asian currencies have been put under pressure. The rupiah in particular.”
©2020 Bloomberg L.P.