UBS Global Asset Management suggests that the “carry trade” could be coming to an end.

The carry trade is a currency strategy that looks to profit by selling low-yielding currencies, such as the Japanese yen, and buying high-yielding ones, such as the Australian dollar, UBS explains. “Apart from a transfer of cash, this currency transaction requires the investor to pay the interest rate of the currency sold, and receive the interest rate of the currency bought, with the difference between them known as the “carry”. Should the carry be greater than the move in the exchange rate between the two currencies, the investor will profit,”’ it adds.

The strategy has proven very successful for several years, but it now appears close to a turning point that would end its effectiveness, according to Brian Singer, regional chief investment officer for the Americas and head of the global investment solutions team for UBS Global Asset Management.

“We have positioned our portfolios to profit from when the currency carry trade inevitably unwinds,” says Singer. “Given our views, we could be seen as wandering dangerously away from the flock. However, we see clear evidence that the herd mentality is destroying the mechanism through which currency prices — or exchange rates — reflect their true value.”

In the report, Singer notes that as volatility has rebounded from multi-year lows over the past three months, the supportive environment for carry trade performance has been diluted. With volatility’s rise, UBS Global Asset Management’s analysis indicates that the overvaluation of positive carry currencies, which have been driven further upward by the public’s high carry trade appetite, has a high likelihood of correcting in the not-too-distant future.

“In the end, UBS Global Asset Management manages currencies as it manages any other asset class, believing that the fair value of a currency is best represented by economic fundamentals,” adds Singer. “As such, we look for over- and undervalued currencies relative to fundamental fair value and do not rely solely on cyclical trends like the carry trade.”