Currency Carry, Momentum, and Global Interest Rate Uncertainty

59 Pages Posted: 5 Jun 2018 Last revised: 29 Apr 2019

See all articles by Ming Zeng

Ming Zeng

Singapore Management University - School of Economics

Date Written: February 1, 2019


Returns to currency carry and momentum are compensations for the risk of global interest rate uncertainty (IRU), with risk exposures explaining 92% of their cross-sectional return variations. One standard deviation change of global IRU risk is associated with a -0.43% (-0.44%) monthly loss of carry (momentum) trade. The unified explanation stems from its power of capturing the crashes of both strategies. An intermediary-based exchange rate model implies that higher IRU tightens intermediaries’ financial constraints and forces them to unwind currency positions or provide less foreign exchange liquidity to international investors. As a result, intermediary escaping from the carry trade leads to losses of carry strategy. Meanwhile, more costly FX liquidity deters the cross-country momentum trades which involve large demand for foreign exchange. This translates to losses of currency momentum as well as momentum strategies in other asset classes. Empirically, the risk of global IRU is indeed priced in the cross-section of momentum portfolios covering many asset classes, suggesting a risk-based explanation for the commonality of momentum returns.

Keywords: Cross-section of FX carry and momentum; risk premium; uncertainty shocks; intermediary asset pricing; momentum everywhere.

JEL Classification: E52, F31, G12, G15

Suggested Citation

Zeng, Ming, Currency Carry, Momentum, and Global Interest Rate Uncertainty (February 1, 2019). Available at SSRN: or

Ming Zeng (Contact Author)

Singapore Management University - School of Economics ( email )

90 Stamford Road

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