Arbitrage trading is back, with the US dollar and euro becoming financing currencies. Will the Korean won and New Taiwan dollar appreciate?

Traders expect that U.S. President Trump's aggressive tariffs may not be fully implemented, leading to reduced currency volatility and a resurgence of arbitrage trading in emerging markets. Analysts are optimistic about the Chilean peso (CLP), Brazilian real (BRL), Mexican peso (MXN), South African rand (ZAR), Turkish lira (TRY), and Korean won (KRW). The preferred funding currencies are the Euro and the U.S. dollar.

Arbitrage trading ( Carry Trade ) rises again

The arbitrage yield index compiled by Bloomberg ( traders borrow a low-yield currency and then invest in another currency that offers a higher yield. ) It hit a seven-year high in late May. According to data from CME Group Inc. ( in recent weeks, asset management firms have increased their long positions in emerging market currencies, with the long position in the Mexican peso reaching a nine-month high.

Arbitrage trading ) Carry Trade ( performs best during low fluctuation periods and has been very popular since around 2020, with most trades financed by ultra-low yield yen. Last August, the Bank of Japan raised interest rates, leading to a surge in the yen, which triggered a chain reaction of yen arbitrage unwinding and a sharp decline in the stock market.

In recent weeks, as global trade tensions have eased, arbitrage trading sentiment has risen again. The global currency volatility index compiled by JPMorgan has fallen from 11% in early April to 8.7% on Friday.

KRW and TWD appreciate, while USD and EUR become financing currencies.

Bloomberg has consolidated the views of several analysts, who are optimistic not only about the Chilean peso )CLP(, Brazilian real )BRL(, Mexican peso )MXN(, South African rand )ZAR(, Turkish lira )TRY(, and Korean won )KRW(. Their preferred funding currencies are the euro and the US dollar. Although the downside of borrowing in US dollars for arbitrage trading is the relatively high interest rates in the US, the prospect of further dollar weakness indicates that some high-yield currencies in Latin America may perform well.

In addition, analysts have made the following suggestions regarding the trends of other Asian currencies:

KRW )KRW(: May appreciate after South Korea elects a new president on June 3.

HKD )HKD(: The decline in Hong Kong interest rates has led traders to use the Hong Kong dollar as a financing tool, causing the HKD to fall to the weaker end of the trading range by the end of May.

Renminbi )CNY(: The prospect of China further easing monetary policy means that the renminbi is also "becoming a very attractive financing currency."

New Taiwan Dollar )TWD(: In early May, the appreciation of the Taiwan dollar led to the sharp liquidation of investors' positions that had previously used the Taiwan dollar as a financing currency, and the exchange rate of the Taiwan dollar soared. The Taiwan dollar broke the 30 barrier again last week and may now move forward in a slow upward pattern

This article discusses the resurgence of arbitrage trading, with the US dollar and euro becoming financing currencies, and whether the KRW and TWD will appreciate. It first appeared on Chain News ABMedia.