Investment insights from Capital Group
Chart 1: High carry currencies have been strong year-to-date
1. An exchange rate “carry trade” goes against the uncovered interest rate parity theory (UIP). According to UIP, the expected change in an exchange rate should be equal to the interest rate differential for the two currencies for the same period. If this does not happen, in theory, there is an opportunity to make an abnormal return, using the carry trade, by borrowing a low interest-rate currency and investing in a higher interest rate currency.
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