EMFX Carry Trading in August – Choosing the Right Area

Calm August?

In theory, financial markets were formed for a quiet August – or at least, that is what the FX market said to us. Seeing the term structure of the volatility curve traded by EUR/USD, the expected volatility quickly falls after the risk of this week’s event.

One month EUR/USD is traded one full Vol under the volatility of one week.

What is left on the calendar is a report on Friday and the time deadline for August 1. In the latter, the view seems to be that even if the tariffs on some countries returns to the level of ‘Liberation Day’, they may not live there for a long time. The current market firmly believes that the tariff is more transactional than ideological and that the 15% baseline bear can be secured if trading partners make a large enough commitment to spend or invest in the US.

While some people argue that the market is too satisfied about tariffs, the question is: What will change in August? Many central bankers, politicians, and investors left this month, and assuming the trading agreement of the high profile-such as the AS-China-Digerpan-long trading weapon for 90 days, the default regulation of the market might be ‘Let’s take this in September’.

Maybe the biggest risk now is secondary sanctions for people like China, India and Türkiye when Washington tries to change the screws in Russia and those who buy cheap oil.

Which said, the level of cross-market volatility continues to rise lower and except for some large surprises, it seems that the level of volatility can remain low this August.

Carry on Carry Trading

Low volatility certainly brings attention back to carry trade and a basic view that carries a currency will not depreciate as much as shown by interest rates and high financial theory. In fact, currencies like Pounds Egypt not only offer annual interest more than 20% but also respect the dollar to provide a total return of 15% from year to date.

We mention Egypt because many higher results can be found in developing markets. These countries generally face higher inflation and have a higher sovereign risk. This usually requires a higher interest rate. FX investors can access this higher interest rate through the FX Forward market that can be delivered and cannot be conveyed.

But high results need to be seen in the risk context. Besides, there is no point in taking money in front of Steamroller. And that’s where the ‘carry-to-risk’ ratio enters. Below, we adjust the results of the one month available through FX going forward with the implicit-volatility expected through the FX option market.

Leading the package here is the super high result of Turkish Lira and Pound Egypt. And especially, Indian rupees that are adapted to volatility are more interesting than the Brazilian who are clearly-even though the interest rates are twice as higher in Brazil than in India.

Re -testing – some important points

Above, we have discussed the high target target currency for Carry trade. Half of the other equation is which currency will be funded? Here, focus on the G10 room traditionally is Japanese Yen, with the current loan fee of around 0.3% per year. Also very cheap to borrow in the Swiss franc. Or, for investors with a penalty for direction, the dollar has become a popular funding currency even though it is expensive enough to borrow at a rate of above 4% per year.

There are a myriad of permutations to be seen when coming to trade carrying, but in this exercise we see high blackouts developing in four regional blocks: the Middle East and Africa (Turkey, Egypt and South Africa), Asia (India, India and the Philippines), Polam, Hunge, Mexico, Mexico, Colombia) and Central and Central European and Central and Poland.

Seeing these blocks in a basket that are equally weighted (for example, Latam each 33% for Brazilian Real, Mexican Peso, and Colombian Peso), we then support the performance of years-dated with funding from two separate examples: funding from dollars or funding from the Yen and Swiss baskets.

This is the performance of the strategy.

It is also important to see some of the main financial metrics of this strategy, such as the maximum withdrawal that investors may suffer during the life of the strategy and the Sharpe – the size of the return volatility.

Some observations

• Maybe a clear and unclear conclusion to start. Carry trades funded from the dollar have outperformed surprising given the well-documented dollar decline this year. But see the maximum withdrawal that is greater when funded from Yen and Swiss Franc compared to dollar funds. Here, people can argue that many market currencies that appear (outside Europe) are managed to the dollar, and the scope for adverse reactions (except crisis) is lower.
• Seeing across the regional block, CEE’s performance is only a function of EUR/USD rally – and almost all benefits are made from places rather than flower returns. Making a call on EUR/USD will be a driver to invest in CEE BLOC this August. Asia is very bad. With a high withdrawal and low Sharpe ratio, it seems clear that this region will not be at the spearhead of Carry Trade strategy. The Latam and the Middle East block has performed quite well because it carries a trading strategy, even though they are not immune to the declines of Turkish Lira almost 4% in mid-March, for example, when the Mayor of Istanbul was arrested.

The road ahead in August

Assuming US data or tariff stories do not thwart the idea of calm trading conditions in August and bring a trading strategy to be in demand, what should we see?

As above, the trading strategy funded by the dollar has outperformed this year, and after the July Corrective Boutip, the strategy funded may still be popular in August. Our view that EUR/USD might find support near the 1.13 month area this month can once again support the CEE strategy for what is effectively a directed call from the trading strategy to bring per se.

Regarding the risk of events in CEE, investors will be aware of fiscal prizes in Hungary ahead of the election next year, but at this time, we doubt that the risk will encourage the mass exodus of those who pursue 6% of the implied results in Forint. Elsewhere, Koruna Czech must survive alone, supported by the National Bank Hawkish Czech. Weaknesses for Zloty Poland look relatively limited.

Latam offers high yields, and the biggest risk there is now maybe the US-Brasil tariff quarrel. The recent tariff was raised to 50%, mostly for political reasons rather than related to trade. But even this 50% tariff has carvings for products such as orange juice and aircraft parts. Plus, the delay of seven days in implementation still provides negotiated resolution hopes. Mexico is still subject to the tariff of goods outside the United States-Mexican-Kanada (USMCA) agreement (USMCA), but after a decent correction at USD/MXN to 18.85 (and maybe above 19.00), we imagine bringing trading investors to return to Peso.

For Carry Trades who are very popular in Türkiye and Egypt, we think investors can refrain in August. After a setback for Lira in March, investors were very close to following local politics in Türkiye. Here, the case of a large court that saw the feasibility of özgür özel to lead the opposition of the Republican People’s Party (CHP) had been postponed until September. Elsewhere, foreign ownership of Egyptian T Bill must be very high now. Back in March, foreigners hold $ 38 billion – or almost 50% of the total shares. UAE investment, FX liberalization and higher real rates have all helped the pound, and it is unclear what will shake the ship in August. Although Rand is in our MEA Carry Basket, it might prove a little more vulnerable this month because South Africa found itself on the wrong side of the track with fellow BRICS members.

And Asia does not look attractive in August. The biggest geopolitical risk that we can see is the surge in oil prices because Washington is trying to push Russia towards a ceasefire. The higher oil price is bad news for India and the Philippines, and India can also face several tariffs while the higher when the story is played. We also argue that, given the large FX reserves, Türkiye may be more able to protect its currency than India from the surge in oil prices.
Source: Ing