Citigroup Exits Emerging Market Carry Basket Amid Volatility

Citigroup Inc. closed its emerging-market carry basket, exiting long positions in the South African rand, Turkish lira, and the Mexican and Colombian pesos against the Swiss franc and Canadian dollar. The move comes as the Colombian and Mexican pesos dropped 6.6% and 2.6%, respectively, following a Federal Reserve interest rate hike last week.

Market pressure intensified after US Treasury yields reached decade highs, driven by a strong US PMI report and a weak 5-year Treasury auction. Citigroup noted that carry trades typically perform poorly during periods of high volatility and high crowding.

Bank of America Corp. also expressed caution, stating that positioning for developing-world currencies has become stretched. Strategist Raghav Adlakha indicated that a recovery of the carry trade theme depends on lower rate volatility, US rates remaining range-bound, and oil prices staying below $100.