1. Why are interest rates so low in the traditional core
markets of USD and EUR?
2. What makes this “emerging market carry trade” so
different from traditional forms of uncovered interest
3. Why are many investors shorting the dollars and the
Carry Trade involves borrowing
or selling a financial instrument
with a lower interest rate and then
using it to buy another one with a
higher interest rate.
Rate = 5%
Rate = 15%
After the global crisis, governments and central banks want massive quantities
of capital to circulate in their financial systems, by keeping the interest rates
Target inflation rate
Harmonised Index of Consumer Prices (HICP)
Investors engaged in interest rate arbitrage were only earning from the difference in
interest rates without having to worry about movements in exchange rates. However,
this emerging market carry trade gives opportunity to investors to boost their profit by
benefiting both from interest rate differences and appreciation of emerging markets
• Constant appreciation of yen in terms of a dollar,
decreasing interest rates in eurozone and U.S made yen
less popular as a funding currency and started a new
trend, which is dollar and euro carry trade.
Would you invest in emerging market
• Yes, if you believe in constant appreciation of emerging
market currencies, you can earn substantial amount of
money by investing in those currencies.