ING: Interest rate spread trading may trigger a summer rally in emerging market currencies
ING Groep pointed out that emerging market currencies benefit from the weakening of the US dollar. If the US lowers interest rates, it will attract more funds for carry trades, further boosting emerging market currencies. The report mentioned that high implied yields in markets such as Brazil and Mexico attract investors, while the Turkish lira and South African rand also show high-risk, high-return potential. Although some countries in Eastern Europe face political challenges, the overall trend is positive, and it is expected that most emerging market currencies will appreciate against the US dollar by 2025
According to the Zhitong Finance APP, ING Groep stated that emerging market currencies are benefiting from the weakening of the US dollar. If the US lowers interest rates, attracting more funds for carry trades, emerging market currencies may receive further boosts.
Chris Turner, head of foreign exchange strategy at ING Groep in London, and his colleagues noted in a report on Tuesday that investors are speculating whether the trade agreements between the US and Asia will involve exchange rate issues, while Latin American economies seem to have avoided the worst impacts of President Donald Trump's tariffs.
ING Groep stated that relatively high implied yields in markets such as Brazil and Mexico are proving attractive, as are the "high-risk, high-reward" Turkish lira and South African rand. ING Groep added that despite some countries (especially Romania) facing domestic political challenges, Eastern European currencies are reflecting the strength of the euro against the dollar.
Most emerging currencies are expected to appreciate against the US dollar by 2025.
Turner stated, "If the Federal Reserve really starts to cut rates, and more importantly, if volatility stabilizes further, we will start to hear more about dollar funding carry trades." "This could be the story of this summer."
Carry trades involve borrowing currencies from countries with relatively low interest rates and investing those funds in markets with higher interest rates, typically in developing economies. This strategy, favored by emerging market investors, offers enticing returns, but during periods of high volatility, such trades can be quickly unwound
