Carry Trade, Commodities Help EM Currencies Remain More Stable Than Those of G-7 Nations

Emerging-Market Currencies Show Unusual Stability

Photographer: Valeria Mongelli/Bloomberg

According to recent data, currencies from emerging markets have demonstrated greater steadiness than those from developed economies—a trend that some analysts believe could soon set a new record for longevity.

JPMorgan's volatility indices reveal that for nearly 200 consecutive days, the currencies of developing nations have experienced less fluctuation than those of the Group of Seven countries. This is the longest such period since 2008, and if it surpasses 208 days, it will be the longest streak since the year 2000.

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This period of calm in markets typically seen as more volatile is being fueled by several factors. The weakening of the US dollar and expectations that the Federal Reserve will ease policy gradually have reduced pressure on emerging economies. At the same time, strong commodity prices and significant capital inflows have boosted demand for assets in these markets. JPMorgan Asset Management notes that these conditions are making carry trades increasingly attractive.

“Emerging-market currencies continue to be favored for carry trades, and as long as volatility remains low, we expect steady inflows into local assets,” said Jason Pang, a fixed income portfolio manager at JPMorgan Asset Management in Hong Kong.

The carry trade—borrowing in currencies with low interest rates to invest in higher-yielding emerging-market assets—benefits from stable conditions and can help keep currencies steady by encouraging ongoing investment. According to Bloomberg’s capital flow proxy, investors have directed funds into emerging markets at the fastest rate for this time of year since 2019, building on last year’s surge, which was the largest since 2009.

These inflows are having a positive impact. A Bloomberg index tracking eight emerging-market currencies has gained around 2.8% so far this year, following a remarkable 17.5% increase last year.

There are also underlying structural reasons for this stability. Improvements in economic fundamentals, stronger growth compared to developed countries, and healthy foreign exchange reserves are all contributing to the subdued volatility of emerging-market currencies, according to Matthew Ryan, head of market strategy at Ebury Partners Ltd.

Developed Markets Face More Volatility

In contrast, currencies in developed economies have experienced more turbulence. The US dollar’s implied volatility increased earlier this year after President Donald Trump threatened tariffs on Europe as part of his Greenland acquisition efforts, combined with uncertainty over the Federal Reserve chair nomination.

Volatility in the Japanese yen has also risen due to concerns about Japan’s fiscal situation and the possibility of government intervention. If the yen carry trade unwinds, it could add further pressure—a scenario some have described as a “ticking time bomb.”

Growing doubts about the US’s economic trajectory and fiscal health have led some investors to seek alternatives to the dollar.

“Investors are increasingly considering more stable emerging-market currencies, such as the Singapore dollar, Thai baht, and Chinese yuan,” said Daniel Tan, portfolio manager at Grasshopper Asset Management. “This trend of low volatility in EMFX could persist until a major risk event emerges.”

Upcoming Economic Events to Watch

• Thailand and Colombia are set to release fourth-quarter GDP data.
• Central banks in Indonesia, the Philippines, and Romania will announce interest rate decisions, while Mexico will publish minutes from its latest monetary policy meeting.
• Malaysia and South Africa are scheduled to report new inflation figures.

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