EM has gotten hit hard this year as a strong dollar (USD) and a collapse in global commodity prices have combined with debt concerns to hammer growth. Below we show the change in the spot rate for a diverse selection of EM currencies versus the USD. Versus December 31st, 2014 levels, Brazilian real now buys 29% fewer dollars. But if you had bought many of these EM currencies on that date and held them through today, you would be in a lot less pain. Why? Interest income. Because overnight rates are still for all intents and purposes zero in the US, many EM currencies have significantly higher deposit rates than the US. The result is that while each currency buys less, you’ve accumulated a bigger pile of it over the last year, thanks to the interest payments on your holdings. Positions in HKD, CNY, INR, RUB, and most of all ARS have collected enough positive income from that interest to create a positive total return since the beginning of the year. Of course, not all of these currencies are freely tradable, and the volatility has been high. But the table and chart below do a good job illustrating the power of interest rate differentials. In currency trading, the spot price is not the only one that matters.