Lower volatility is favouring the carry trade, where currencies in Latin America and Central and Eastern Europe offer the highest risk-adjusted yields, economists at ING report.

Dollar does ok in a carry trade world

“The stand-out is the lower levels of traded FX volatility around the world – both in the developed and emerging FX space. Lower levels of volatility go hand-in-hand with a slightly more constructive risk environment, where the MSCI World equity index is edging up to the highs of the year.”

“The currencies of Latin America (especially the Mexican Peso) and Central and Eastern Europe (especially the Hungarian Forint) offer the best risk-adjusted return. These have been the outperformers this year and could continue to do well unless US debt ceiling negotiations take a turn for the worse.”

“Expect the Dollar to stay slightly bid in this rangy FX environment until there are much clearer signs of US disinflation and a slowing activity – which we have argued is more a story for the third quarter.”