LONDON, June 5 Reuters A sharp drop in Mexico39;s currency after a landslide election result has shaken foreign exchange markets as far as Hungary and Turkey this week, leaving investors asking whether the unwinding of hugely popular carry trades will continue.

A carry trade involves investors borrowing in currencies that have low interest rates, such as the Japanese yen or Swiss franc , and buying higher yielding ones such as the Mexican peso or, recently, the U.S. dollar. It has boomed in popularity as interest rates have diverged around the world and market volatility has stayed low.

Yet the peso39;s dramatic fall against the yen this week it dropped 4.4 on Monday in its biggest daily decline since the COVID19 crisis is a sign that investors have been rapidly backing out of some of their favourite, and most lucrative, trades.

Pockets of volatility remained on Wednesday, with the yen falling sharply against the dollar, leaving investors to consider whether the old approach is still viable.

The generalised rise in emerging market FX volatility … has prompted deleveraging in carry around the world, said Chris Turner, head of global markets at lender ING. Where do we go from here?

ELECTION SHOCKS

The news that Claudia Sheinbaum was set to win by a landslide in Mexico39;s presidential election caused the peso to tumble, with markets spooked by possible constitutional reforms and impact on the U.S. trade relationship.

India39;s rupee also stumbled on Tuesday as…