Trade idea: Long BBVA EM FX Carry Index: we expect FX market moves to be driven primarily by USD volatility. Our EM FX carry long-short basket has remained relatively flat this year vs. 7% carry potential from the interest-rate differential. We previously published our positive view on the FX carry strategy in our Risk Premia Outlooks (see QIS Risk Premia Outlook: Carry on! – 4 Sept, Risk Premia: After Liberation Day – 23 April and Risk Premia: Keep calm and carry on! – 10 June). While our preference remains for LatAm carry, in this note we have launched a new BBVA QIS Tactical index to position for wider EM FX carry by including the ZAR, HUF and INR. In the short leg, we have included the CHF and DKK to offer higher exposure to Europe as the funding region where central banks seem to have already reached the end of their cutting cycles.

FX carry on! The current environment of loose financial conditions and a supportive growth regime has historically been favourable for FX carry strategies, which have tended to perform best when financial conditions are as loose as they are today. The current environment of recovery is also favourable for FX carry strategies. The best time to enter these strategies is when emerging from a recession. We initiated our positive view on the FX carry strategy back in April when we were just coming out of the trough in risk assets. Since then, the FX carry strategy has delivered the best returns among BBVA QIS risk-premia strategies.