Fed Rate Cut Expectations Rise as Arbitrage Traders Increase Bets on Emerging Markets

ChainCatcher reports, citing Jintou, that carry trades are making a comeback among emerging market investors as markets bet that the Federal Reserve will begin cutting interest rates next month, weakening the US dollar and boosting interest in high-yielding currencies. Asset management firms such as Neuberger Berman and Aberdeen Group are increasing their exposure to currencies in countries like Brazil, South Africa, and Egypt.

They believe that a weaker dollar and reduced volatility have created a favorable environment for this strategy. In carry trades, traders borrow in low-yielding currencies and buy high-yielding ones. Earlier this year, such trades delivered double-digit returns, but paused in July due to a rebound in the dollar.

Recently, disappointing US employment data has reinforced market expectations that policymakers will have to cut rates next month to avoid a recession, reigniting interest in arbitrage trades. From DoubleLine to UBS, many institutions have recently joined the bearish camp on the dollar, stating that “the bearish dollar narrative is back in play.”

Ulku Yetta, co-head of emerging market debt at Neuberger Berman, said: “The likelihood of a significant rebound in the dollar is very limited, while overall global economic growth remains relatively robust.” He prefers carry trades in South Africa, Turkey, Brazil, Colombia, Indonesia, and South Korea.