Interest rates have recorded a significant drop in the existing initial primary markets of USD and EUR following the global financial crisis that occurred between 2007 and 2009. The central banks of both these nations set and sustained the low-interest rates in a bid to maintain high levels of liquidity. The other aim of the low rates was focused on offering support to the fragile banking systems and keeping the commercial entities afloat. Investors have contributed to the maintenance of the low-interest rates. This was after they identified an opportunity to make a profit through using funding that had almost nil interest (Ahmed & Zlate, 2014).
The inability of governments and regulatory bodies to control the emerging market carry trade is worrying. This is what distinguishes the upcoming markets trade differ from the initial forms of undiscovered interest arbitrage. For one, majority of the investors do not break any laws in their engagements. Secondly, lousy market trends and activities that affect the economy cannot be regulated outside the confines of the law. Third, raising interest rates is not an option for the central banks because the economy is yet to recover from the financial crisis entirely. These circumstances tie the hands of a willing government and central bank (Jiang, 2016).
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The emerging market carries trade is unique because of the way investors are responding to it. Investors are borrowing money at very low-interest rates and then exchanging it for foreign currency. The money is then put into a foreign bank, most of which are always glad to gain capital. The aim is to earn enough money from the interest given in this foreign banks on deposits. However, this disadvantages or shorts the USD and EUR markets because they have a less capital share to trade with. These practices, and not low-interest rates, is what makes the emerging market carry trade unique and of interest to financial analysts (Ahmed & Zlate, 2014).
References
Ahmed, S., " Zlate, A. (2014). Capital flows to emerging market economies: A brave new world?. Journal of International Money and Finance, 48, 221-248.
Jiang, Y. (2016). Carry Trade in Emerging Markets: Return and Macroeconomic Risks.
