Three-quarters of global carry trade has been unwound: JPMorgan

Around three-quarters of the global carry trade has been removed, JPMorgan strategists said in a Wednesday note.

In their recent report, JPMorgan noted that the risk-reward for global carry is low due to the upcoming US elections and the potential repricing of funders on lower US rates. Also, they pointed out that rates momentum is expected to turn more significantly against G10 carry, which favors a rotation to value.

"Our view remains unchanged for both, but carry baskets already suffered a significant drawdown following the tech sell-off," strategists said in the Wednesday note.

For G10, EM, and global portfolios, the drawdowns have been roughly 10%, “which means that all positive year-to-date returns have been wiped out,” they wrote.

“The losses have been ongoing since end of May for baskets with EM currencies but are more recent for G10. The drawdowns were large enough to significantly cut into the accumulated returns since end of 2022.”

The spot component of the global carry basket indicates that 75% of carry trades have been removed, although this is not a perfectly reliable measure, strategists pointed out.

JPMorgan observes that the strategy drawdown has been substantial compared to equities, undershooting the historical FX carry-equity drawdown relationship.

The Wall Street giant suggests that the combination of this element with a light central bank calendar next month might present a short-term opportunity to position for a repricing, despite the medium to long-term deteriorating backdrop they highlighted earlier.

The consequences of the recent carry sell-off for other signals have been straightforward. Value strategies have appreciated accordingly, FX rates momentum has regained a significant portion of its losses as currencies re-correlated with rates direction, and growth RV has held up well despite high volatility, strategists explained.