📊💱G10FX Carry Factor Underperforms In August: Cable FX Macro

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• Carry strategies experienced a slight underperformance in August as the USD's decline reduced yields on high-carry currencies like the Brazilian real (BRL) and Norwegian krone (NOK). These currencies, which had benefited from commodity rallies, faced challenges due to global risk-off sentiment linked to U.S. tariffs. Emerging market (EM) carry, a segment of this strategy, initially saw gains in early 2025 from interest rate hikes (such as those by Brazil's central bank), but the USD sell-off in August prompted a shift away from high-yield currencies.

• J.P. Morgan observed a "carry to value rotation" occurring, with high-yield currencies underperforming low-yield ones by about 1-2% in G10 currency pairs. Overall, FX EM carry yielded approximately 0.5% excess returns in August and remained flat in early September, according to MUFG and CME Group analyses. This trend is consistent with historical patterns where carry strategies suffer during periods of USD weakness and low yield dispersion (current G10 carry spreads are at 3.3%, slightly down from 3.4% in Q1).

• Momentum strategies performed well, with past winners like the Swedish krona (SEK), which rose about 3% against the USD in August as the top G10 performer, continuing to outperform past losers like the New Zealand dollar (NZD), which fell about 4%. Cross-sectional FX momentum (investing long in the top third of performers and short in the bottom third over 1-12 months) generated approximately 2-3% excess returns, according to Quantpedia and AQR-style simulations. Time-series momentum (trend-following) also benefited from the USD's multi-month decline. This trend continued into early September, with the Japanese yen (JPY) gaining due to expectations of a Bank of Japan (BoJ) rate hike (now only 5 basis points are priced for October, up from zero).

• Studies from sources like Interactive Brokers confirm momentum's autocorrelation with carry/dollar factors, enhancing gains when past returns are positive, as seen following the reversal of July's USD rebound.