About three-quarters of the global carry trade has been removed, JPMorgan strategists said in a note on Wednesday.
In their recent report, JPMorgan noted that the risk-reward ratio for global carry is low due to the upcoming US elections and the potential repricing of lenders based on lower US interest rates. They also pointed out that yield momentum is expected to reverse significantly against the G10’s carry, fueling a rotation to value.
“Our view remains unchanged for both, but carry baskets have already seen significant declines following the tech sell-off,” strategists said in Wednesday’s note.
For the G10, emerging markets and global portfolios, the decline was around 10%, “meaning all positive returns to date have been wiped out,” they wrote.
“The losses have been going on since late May for baskets of emerging currencies, but are more recent for the G10. The drawdowns were large enough to significantly reduce cumulative returns since the end of 2022.”
The spot component of global carry trades indicates that 75% of carry trades have been dropped, although this is not a completely reliable measure, strategists pointed out.
JPMorgan notes that the strategy pullback has been significant compared to equities, and is below the historical carry-equity-drawdown relationship of currencies.
The Wall Street giant suggests that combining this element with a light central bank calendar next month could provide a short-term opportunity to position itself for a repricing, despite the deteriorating medium to long-term backdrop they face emphasized earlier.
The impact of the recent carry sell-off on other signals was clear. Value strategies have appreciated accordingly, currency momentum has recovered a significant portion of its losses as currencies recorrelated with interest rate direction, and growth RV has held up well despite high volatility, strategists explained.
