Carry on?

The merits of our carry trade basket have faded over the past 12 months. There remains a yield pick-up in Brazil and Russia, but Argentina offers the double-digit appeal of the carry trades of old (i.e. pre-crisis). We now abandon this trio. But we haven’t deserted higher-yielding EM FX entirely. Mexico stands out to us as a long. There are uncertainties surrounding NAFTA and there are political risks. But we think both are compensated for. Monetary policy is too restrictive, meaning inflation will fall faster than expected, and the currency remains fundamentally cheap. We would be long the Mexican peso versus the US dollar.

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