The maximum Sharpe Ratio EM carry portfolio as of this morning is shown in the chart below. Predictably, the South African rand (ZAR), Turkish lira (TRY), Brazilian real (BRL) and Colombian peso (COP) all are either negative or zero positions; the portfolio holds mainly Asia, but also Chilean peso (CLP).

The portfolio is constrained to show a normal distribution of returns (Kurtosis=3, Skew=0), and gives a Sharpe Ratio of 2.3 using the past month’s volatility (yield of 5%). I wouldn’t buy the portfolio, to be sure; as usual it is purely for diagnostic purposes.

The interesting thing to observe is that some of the most attractive currencies have been beaten up the worst in the last couple of sessions, notably the CLP, which really doesn’t have any hair on it. That suggests that EM carry portfolios are being liquidated, and once they are liquidated, they will be highly attractive. In other words, macro risk from EM is starting to taper off.