Goldman Sachs Says Take Profit on Emerging-Market Carry Trade

  • Recommendation was long Brazil, Russia, India and South Africa
  • Mexican peso and Turkish lira seen as having upside potential

Goldman Sachs told investors to close out of an emerging-market carry-trade recommendation it made eight months ago, saying there was little scope for appreciation.

Following the bank’s advice to buy Brazil’s real, Russia’s ruble, India’s rupee and South Africa’s rand while shorting the Korean won and Singapore dollar would have delivered a 9.7 percent return, strategists Marty Young and Michael Cahill said in a note to clients. While Goldman Sachs is overall positive on emerging-market currencies, the analysts said the real, ruble and rupee were unlikely to strengthen much further in coming months.

Carry-trade investors, who profit by buying higher-yielding currencies with money borrowed in countries where interest rates are lower, made out well in the first half of the year as the dollar weakened. Investors are anticipating that the yield advantage in developing-nation assets may narrow over coming months as central banks in developed nations pull back on monetary stimulus, increasing interest rates in those countries.

The Goldman Sachs strategists said Mexico’s peso, Turkey’s lira and South Africa’s rand are now the most attractive carry-trade currencies. Amid currencies with lower yields, the bank said there is appreciation potential for Peru’s sol and recommended the Polish zloty and the Czech koruna against the euro.

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