• Currency arbitrage becoming profitable again with falling USD
  • Many emerging nations planning to stabilize or increase interest rates
  • Volatility in emerging markets starting to drop

Currency arbitrage, which was hit badly during Q2 2018 by a stronger dollar and capital flowing out of emerging markets, now offers positive returns once again with a dollar that is losing value.

Currency traders who borrow dollars to purchase Argentine and Mexican pesos and the South African rand have been particularly successful.

Although most carry trades for the large emerging currencies are still failing to make a profit so far this year, their recovery during the last few days might be a signal that concerns about an international trade war are subsiding and that developing countries’ central banks are winning the trust of investors again.

Mexico increased its core interest rate to its highest level in nine years after similar steps by India, Argentina, Philippines, Indonesia and Turkey.

Countries such as Brazil, South Africa and Russia have either announced an end to ongoing rate reductions or stated they are willing to announce rate increases should their currencies lose more value. The Bloomberg Dollar Index has lost 1.7% of its value since June 27, further strengthening emerging currencies.

In some cases, investors are preparing for more good news. The South African rand’s implied carry return rate for the month ahead showed the best gains in 12 months last week after making adjustments for volatility and has reached its highest level since the start of June.

These returns are increasing because of more moderate price swings. For example, the JP Morgan Emerging Market Volatility Index dropped more last week than it did at any other time since March 9.

Certain international banks are becoming increasingly bullish. On Monday, Citigroup reduced its long USD positions against the ZAR, Hungarian forint and Polish zloty, while Credit Agricole CIB advised clients to start purchasing China’s renminbi.

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