Carry trades are out of fashion with slower growth around the globe. A significant portion of the carry trade flows were coming from investors who believed that growth in high yielding countries would continue. This view may now be misplaced. The link with carry and growth is through monetary policy.
The high yielding countries have also been those countries with stronger growth. These are also the countries where the central banks have been tightening. It was assumed that as long at the central banks were responding with raising rates to control growth, there would be a positive premium for holding these currencies.On the other hand, if there are slower growth forecasts, there will be less tightening. Expectations will be that high yielding countries will see more rate declines.
Additionally, there is the view that a global slowdown will favor the dollar over other currencies. We have seen the safe havens perform better, so the short leg of the carry trades have been especially unfavorable.
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