Expectations of Fed interest rate cuts rise, arbitrage traders increase bets on emerging markets

According to a report by Golden Finance, spread trading is making a comeback among emerging market investors as the market bets that the Federal Reserve will start cutting interest rates next month, causing the US dollar to weaken and boosting market interest in high-yield currencies. Asset management institutions such as Neuberger Berma and Aberdeen Group are increasing their presence in currencies of countries such as Brazil, South Africa, and Egypt. They believe that the weakening of the US dollar and the easing of volatility have created a mature environment for this strategy. In this strategy, traders borrow currencies with lower yields and buy currencies with higher yields. Earlier this year, such transactions recorded double-digit returns, but were put on hold in July due to the rebound of the US dollar. Recently, poor employment data in the United States has strengthened market expectations that policymakers will have to cut interest rates next month to avoid an economic recession, driving arbitrage trading to heat up again. From DoubleLine to UBS, many institutions have recently joined the bearish camp against the US dollar, stating that "the bearish narrative of the US dollar has reappeared". Ulkietta, co head of emerging market debt of Luboma, said: "The possibility of a sharp rebound in the US dollar is very limited, and the overall performance of global economic growth is still stable." He preferred to carry out carry trade in South Africa, Türkiye, Brazil, Colombia, Indonesia and South Korea. (Golden Ten)