Currencies with the highest interest rate levels are going to suffer most – Commerzbank

Has 2023 been the golden year for carry trades? Economists at Commerzbank analyze the performance of the carry strategy.

2023 was rather disappointing from the carry traders’ point of view

2023 was rather disappointing from the carry traders’ point of view. The development of exchange rates did not provide any performance. High-yielding currencies did not appreciate against low-yielding currencies. The performance resulted exclusively from the rate advantage.

I don’t know any carry traders who would rely on this strategy merely because of the rate advantage. Expected exchange rate gains are always the most important argument. That means that carry trades did not work as expected in 2023.

However, I agree with the competition that 2024 will probably not provide a good carry trade performance. If central banks on the whole will cut interest rates again, principally those central banks will be the most aggressive who were in the biggest rush on the way up too. That means currencies with the highest interest rate levels are going to suffer the most.