Enhanced FX Carry

Macro Matters podcast:
FX carry is back

The investment environment has dramatically changed as the post-GFC and Covid-19 era is over. The new investment regime comes with renewed opportunities to exploit FX Carry, and there are strong reasons why this environment is likely to persist.

In this podcast, Millennium Global's Mark Astley and Abby Cushing take a closer look.

Characteristics

The FX Carry trade has generated statistically and economically significant positive excess returns throughout the history of floating exchange rates with occasional sharp drawdowns in times of market crises e.g., the Global Financial Crisis (‘GFC’) which began in 2008.

The post-GFC era was characterised by interest rate repression and excessive liquidity provision via the adoption of unconventional monetary policy by central banks, which led to a contraction in the FX Carry opportunity.

We have now entered a new market regime in which interest rates are rising. Widening yield differentials are providing an attractive environment for FX Carry which we believe will persist.

Approach

FX Carry strategies seek to capture interest rate differentials. They typically apply passive processes that mechanically buy high yielding currencies and sell low yielding currencies.

The major limitation of passive FX Carry trading strategies is that they tend to incur large short-term losses, in periods of market risk aversion.

Millennium Global’s Enhanced FX Carry approach includes refinements to address this by applying an “FX volatility switch” to reduce carry exposure during high volatility regimes.

Benefits

The Enhanced FX Carry Strategy seeks to provide an attractive risk-return profile.

FX Carry returns are uncorrelated with traditional asset classes and offer a source of portfolio diversification.

We have incorporated enhanced risk management techniques to protect against performance drawdowns.

The strategy transacts in highly liquid developed market currencies and offers daily liquidity.