The expectation of a Federal Reserve interest rate cut is rising, and arbitrage traders are increasing their bets on emerging markets

ChainCatcher news, according to Jinshi reports, carry trade is making a comeback among emerging market investors as the market bets that the Federal Reserve will start cutting interest rates next month, leading to a weaker dollar and boosting interest in high-yield currencies. Asset management firms such as Neuberger Berman and Aberdeen Group are increasing their positions in currencies of countries like Brazil, South Africa, and Egypt.

They believe that the weaker dollar and reduced volatility create a favorable environment for this strategy. In this strategy, traders borrow lower-yielding currencies to buy higher-yielding ones. Earlier this year, such trades recorded double-digit returns, but were paused in July due to the dollar's rebound.

Recently, poor U.S. employment data has reinforced market expectations that policymakers will have to cut rates next month to avoid a recession, driving a resurgence in arbitrage trading. From DoubleLine to UBS, many institutions have recently joined the bearish dollar camp, stating that "the bearish narrative on the dollar has resurfaced."

Neuberger Berman's co-head of emerging market debt, Urquhart, stated, "The likelihood of a significant rebound in the dollar is very limited, while the overall performance of global economic growth remains robust." He prefers to engage in carry trades in South Africa, Turkey, Brazil, Colombia, Indonesia, and South Korea.