Citi: Carry Trade Still Has Opportunities, but Don't "Set and Forget"
nashnova research
Citi's head of US FX trading Fuad Muvdi says emerging-market carry trades have returned up to 26% this year, but narrowing rate differentials mean investors can no longer treat the strategy as a passive bet.
How does the carry trade actually work?
The carry trade — borrowing in a low-rate currency and investing in a high-rate one to pocket the difference — runs on one simple logic: money flows where yields are highest.
Citi is currently long three EM currencies against the dollar: the Colombian peso, the Brazilian real, and the Argentine peso.
This means → Citi believes these three markets can sustain their high rates long enough for the yield gap to outweigh FX volatility risk.
How much have these currencies returned this year?
Per Bloomberg data, a long-Colombian-peso / short-dollar position has returned roughly 26% year-to-date, leading EM carry strategies.
The Argentine peso equivalent returned about 15%; the Brazilian real about 8.5%.
In plain terms = one simple move — borrow dollars, buy EM currency — earned a quarter of your capital in the best case. That is a striking return for a rates-driven trade.
Where is the biggest risk?
Muvdi warns: if US inflation stays elevated, the Fed's rate outlook could turn more aggressive, compressing the gap between high- and low-yield currencies.
This means → the carry trade lives on the rate differential; once that narrows, "many currencies will see a natural pullback."
The Fed held rates steady last week. Muvdi expects the dollar to weaken slightly — helpful for carry in the short term, but the medium-term path still hinges on inflation.
Same high-yield currencies — why does Citi treat them differently?
Brazil: despite political volatility around President Lula's re-election, local rates sit near 15%. Muvdi argues the yield alone compensates investors even if the real goes nowhere.
Mexico: Citi observes investors are "taking chips off the table," a sign the market is becoming more selective about which high-yield currencies to hold.
This reflects a broader shift — carry is no longer a blanket sweep across EM. Country-specific politics and economics are driving real divergence between currencies.
What does Citi's own performance tell us?
Citi's fixed-income, currencies, and commodities division posted $4.4 billion in Q3 revenue — its best quarter in at least a decade.
Strong FX trading volumes offset weakness in rates trading.
In plain terms = Citi is making outsized profits from FX volatility, which itself confirms the market is active and opportunity-rich — but high volatility also means rising risk.
What is Muvdi's bottom line?
"I still believe in the carry trade, but I wouldn't put all my risk on it."
He stresses that market noise is elevated; investors must analyze local factors country by country rather than running carry as a blanket passive strategy.
This means → future carry-trade returns hinge on two key variables: whether rate differentials hold and how the Fed's policy path evolves.
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