Foreign exchange funds double average returns due to the biggest divergence in central bank rates since 2008
- Foreign exchange funds are headed for an annual return of around 7%, according to Bloomberg.
- That's more than double their average return over the last two decades.
Currency investors are seeing big returns this year as differences in interest rates across the top 10 global economies are at their widest since 2008.
Foreign exchange funds are looking at an annual return of around 7%, according to data from BarclayHedge cited by Bloomberg. That's more than double the average return for the past two decades.
So far this year, traders have raked in rewards as high as 20% by selling the Japanese yen to buy the US dollar, Bloomberg reported. And investors who sold Swedish krona to purchase British pound sterling made around 9%.
Returns, adjusted for volatility, are on track to see their highest level since 2016, according to Nomura's Group of 10 FX Carry Index.
Currency "carry trades" are when investors exploit the difference between interest rates in two countries by borrowing in one currency at low rates and investing in a higher-yielding currency elsewhere.
And right now, the differences between interest rates in Group of 10 countries are large, with standard deviations as high as 2.250, according to data cited by Bloomberg.
That's because post-pandemic inflation hit different countries in varying degrees, and each central bank diverged in how they responded. For example, while the US Federal Reserve has raised rates aggressively for a year and a half, the Bank of Japan has kept a firm grip on rates.
Currency carry trades are one of the most popular trades in the foreign exchange market, but they have been quaking as returns have become harder to maintain. Many foreign exchange funds have closed over the years, unable to defend paltry growth.
Since their peak in 2007, roughly 80% of dedicated currency managers have gone under, Bloomberg reported. But recent gains have helped slow the number of fund closures this year.