Conditions that favour a resurgence of carry trades are unfolding with cash likely to flow away from the dollar towards currencies offering higher returns. These trades had thrived earlier this year but were undermined by the dollar’s July-October surge after the higher-for-longer U.S. rate view resulted in a substantial rebalancing of positions. However, with an almost even chance that the first U.S. interest rate cut now happens in May, stocks have been boosted at the same time as currency markets have quieted, providing the basis for a revival of interest in carry trades.
There is a good chance that quietening markets quieten further toward the end of the year which is when traders usually wind down and pare positions, while a big and unexpected drop in oil prices, and the stronger dollar will suppress inflation. Interest rate cuts may come sooner than May and demand for stocks and bonds may intensify. If so the will to invest and gamble will grow with dollars held during an uncertain period sold to buy currencies with higher-yields, or those with similar yields that may be purchased to spread risks away from the current concentration in dollars.