Citigroup: Emerging Market Currency Arbitrage Returns Are Impressive, Short-Term Still Has Room

On August 20, Jin10 data reported that this year, betting on emerging market currencies against the US dollar has provided one of the most attractive returns of the decade. According to Luis Costa, the head of emerging market strategy at Citigroup, there is still room for this trade to continue in the short term. Costa stated that the Fed's more aggressive dovish stance, coupled with the cautious attitudes of emerging market central banks, will continue to support the strengthening of emerging market currencies against the US dollar. An index tracking the returns of eight emerging market arbitrage trades driven by shorting the dollar has risen over 10% this year and is expected to record the largest annual increase since 2017. "The average stance of emerging market central banks is also very cautious, which still indicates the sustainability of real policy interest rates," Costa said. "We also need to consider the market's implied expectations of a possibly more dovish Fed in 2026. Overall, this combination still supports the dollar to remain relatively stable, despite a rebound in international investors' interest in US stocks."