Investors reaping handsome returns on emerging-market currencies this year might do well to heed a warning once made by Harvard economist Jeffrey Frankel, who likened carry trading to “picking up pennies in front of a steam roller.”
Economic theory -- and history -- suggest the strategy of borrowing where interest rates are low to invest in high-yielding currencies is prone to the risk of a sharp reversal when too many investors pile into the trade. Strategists at Bank of America Merrill Lynch warned last week that sentiment on emerging-market currencies is already reaching “exuberant levels.” Saxo Bank A/S’s chief currency strategist says now is the time to take profits.
