Currency Carry, Momentum, and Global Interest Rate Uncertainty

60 Pages Posted: 5 Jun 2018 Last revised: 9 Nov 2018

See all articles by Ming Zeng

Ming Zeng

Singapore Management University - School of Economics

Date Written: November 9, 2018


Currency carry and momentum are among the most popular investment strategies in the foreign exchange market. The carry (momentum) trade buys currencies with high-interest rates (recent returns) and sells those with low-interest rates (recent returns). Both strategies are highly profitable, but little is known on their common risk sources. This paper finds that their high returns are compensations for the risk of global interest rate uncertainty (IRU), with risk exposures explaining 92% of their cross-sectional return variations. Profitability of two strategies also weakens substantially when the global IRU risk is high. The unified explanation stems from its superior power of capturing the crashes of carry and momentum, which usually occur during bad and good market states. An intermediary-based exchange rate model confirms the negative price for the global IRU risk. Higher uncertainty tightens intermediary’s financial constraints and triggers unwinding on long and short positions. High (low) carry and momentum currencies then realize low (high) returns as they are on the long (short) side of intermediary’s holdings. Further empirical evidence indicates that the explanatory power for momentum also extends to other asset classes.

Keywords: Cross-section of 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 (November 9, 2018). Available at SSRN: or

Ming Zeng (Contact Author)

Singapore Management University - School of Economics ( email )

90 Stamford Road

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