Fed rate cuts are expected to heat up, carry traders increase bets on emerging markets

The carry trade has made a comeback among emerging market investors as bets that the Federal Reserve will start cutting interest rates next month have weakened the dollar and boosted interest in higher-yielding currencies. Asset managers from Neuberger Berma to Aberdeen Group are building up the ante in the currencies of countries such as Brazil, South Africa and Egypt. They believe a weaker dollar and less volatility have created a ripe environment for the strategy, in which traders borrow in lower-yielding currencies and buy higher-yielding ones. Such trades, which posted double-digit returns earlier this year, were put on hold in July by a dollar rally. The carry trade has picked up again after poor US jobs data reinforced expectations that policymakers will have to cut interest rates next month to avoid a recession. A number of institutions, from DoubleLine to UBS, have recently joined the dollar bearish camp, saying that "the dollar bearish narrative has been repeated". "The likelihood of a sharp rebound in the dollar is very limited, and global growth overall remains solid," said Urquieta, co-head of debt at Lubman Emerging Markets. He prefers carry trades in South Africa, Turkey, Brazil, Colombia, Indonesia and South Korea. (Jin Ten)