EM currency pairs and carry trade risk - am I oversimplifying?

asked by u/kabir6 · 6d · 2 answers

Been looking at a few EM currency pairs for carry trade potential, specifically a couple in LATAM with high differentials. My main concern is the sudden, outsized political/geopolitical risk that can evaporate those gains quickly. Is there a more nuanced way to assess this tail risk beyond just looking at historical volatility, or am I overthinking the 'sudden' part and it usually provides more warning than I anticipate?

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  • u/lottemurphy· 1 pts· 6d

    It's definitely a valid concern with EM. Beyond historical volatility, I'd suggest looking at sovereign credit default swap (CDS) spreads for those countries – they can often be an early, albeit imperfect, indicator of increasing political or economic instability. Might help gauge that 'sudden' risk a bit better.

  • u/tariq_n· 1 pts· 5d

    You're not overthinking it; that's the core challenge with EM carry. Beyond historical vol, consider things like bond yield spreads vs. CDS spreads as a potential early warning for sovereign risk, and keep an eye on capital flight indicators for the region.

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