South African Rate Increases Won't Save the Carry Trade: Chart

It’s not been a good five years for investors who seek to benefit from rate differentials between the U.S. and South Africa -- and 2016 is shaping up to be no better.

The so-called dollar-rand carry trade has posted negative returns for five years, including the biggest annual loss last year since the 2008 financial crisis, according to data compiled by Bloomberg. This year, the trade is already down 5.7 percent even after South Africa’s central bank lifted its policy rate by 50 basis points since July to 6 percentage points above the U.S. equivalent.

While traders in interest-rate derivatives are pricing in another 155 points of increases this year, that won’t rescue the carry trade as the rand extends its record slump, eroding returns, according to Barclays Plc. “The renewed spike in rand volatility detracts from the rand’s carry appeal, and we believe the market is too hawkish about local policy rate expectations,” Johannesburg-based strategist Mike Keenan said in a note this month.

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