JP Morgan designs emerging-market forex carry index

JP Morgan has created an index that seeks to exploit the carry trade in emerging-market currencies.

JP Morgan’s new carry trade index is similar to its existing IncomeFX index, which covers the G10 currencies. “Like IncomeFX, it’s an index that targets carry, but it includes substantial modifications to cater to the specific nature of emerging markets,” said Tim Owens, London-based global head of currency and commodity solutions at the bank.

The index, called IncomeEM, is intended to deal with the higher volatility of emerging-market currencies. It keeps track of interest rates, along with volatility implied by forward rates, on a basket of 20 emerging-market currencies against the US dollar. Using this data, it is rebalanced monthly to invest in the five currencies with the highest carry-to-risk ratios.

In addition, the strategy has a target volatility of 10%. It matches this by ratcheting leverage up or down depending on the historical volatility of the five currencies selected. “Once we’ve selected the currencies we want to invest in, we apply leverage or de-leverage, according to what the observed volatility of that basket has been in the past,” explained Owens. Leverage is restricted to a maximum of 300%, he added.

JP Morgan, which will publish the IncomeEM index on Bloomberg, is hoping to market products based on it to a range of investors. Although no trades have been conducted yet, Owens pointed to interest from institutional investors and high net-worth individuals. “This product is aimed at clients who wish to be exposed to foreign exchange carry but do not wish to manage a dynamic carry trade themselves,” he said.

The new index is the latest in a growing number of investment products that attempt to exploit increased investor interest in the carry trade.