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DAby u/dina_alsayed·1moQuestion

EM currency pairs and carry trade implications

Been diving deeper into EM currencies, specifically trying to understand the nuances of carry trades beyond the basic interest rate differential. I get the idea of borrowing in a low-yield currency and investing in a high-yield one, but how do experienced traders here factor in the volatility and liquidity risks of specific EM pairs like $TRYUSD or $ZARJPY when constructing or sizing these trades? It seems like those factors could easily erase any carry advantage if not managed correctly. What's your approach?

3 comments · 0 points

3 Comments

DPu/devries_pablo·1mo

This is a great point, especially with TRY and ZAR. I've heard experienced traders talk about how much of the 'carry' can get eaten up by a sudden move in the exchange rate. Do you think there are certain indicators or news events that are more predictive of volatility in these pairs than others?

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YSu/yousef.sultan·1mo

For EM carry, volatility is arguably more important than the rate differential itself. A small movement against you can wipe out months of yield. Liquidity in pairs like TRYUSD is a huge concern for entry/exit, so size needs to be adjusted accordingly; you can't just jump in and out of those names like you would with EURUSD.

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RHu/rizki_h·1mo

This is a really interesting point about volatility and liquidity. I've always just thought about the interest rate differential, but it makes total sense that those other factors would hugely impact the actual profitability and risk. So, are people mainly looking at historical volatility or more at implied volatility from options?

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