Economic Momentum and Currency Returns
70 Pages Posted: 18 Mar 2015 Last revised: 4 Apr 2019
Date Written: March 31, 2019
Past trends in fundamentals linked to economic activity and inflation predict currency returns. We find that a trading strategy that goes long currencies with strong economic momentum and short currencies with weak economic momentum exhibits an annualized Sharpe ratio of 0.70 and yields a significant alpha when controlling for standard carry, momentum, and value strategies. The economic momentum strategy subsumes the alpha of carry trades, suggesting that differences in past economic trends capture cross-country differences in carry.
Keywords: Carry trade, foreign exchange rates, predictability, trend following, trends.
JEL Classification: F31, G12, G15
Suggested Citation: Suggested Citation