Analysts expect a continued dollar-centric market where most G10 currencies move in tandem against the dollar, keeping dollar correlations high. However, they are bearish on cross-correlations (e.g., involving Sterling and Euro), anticipating greater divergence between non-dollar currencies, which presents an opportunity for investors.

The success of the current EM FX carry trade isn't driven by wide interest rate differentials, which are not historically high. Instead, the strategy is performing well because a resilient global growth environment is suppressing currency volatility, making it profitable to hold high-yielding currencies against low-yielders.

A decoupling is occurring where EM high-yield currencies are outperforming DM high-beta currencies. Investors are increasingly using DM currencies as funders to capture attractive carry in select EMs like South Africa (precious metals), Mexico (stable carry), and Hungary (improving fundamentals).

The market believes the Fed is more likely to ease on weak data than tighten on strong data. This perceived asymmetry in its reaction function effectively cuts off the 'negative tail risk' for global growth, making high-yielding emerging market carry trades a particularly favorable strategy in the current environment.

With dollar correlations at elevated levels, finding cheap, clean directional expressions against the dollar is challenging. Sophisticated traders are creating bearish dollar baskets that mix G10 currencies (AUD, NOK) with Emerging Market currencies (HUF, ZAR) to achieve greater pricing efficiency.

While broad emerging market currency indices appear to have stalled, this view is misleading. A deeper look reveals that the "carry theme"—investing in high-yielding currencies funded by low-yielding ones—has fully recovered and continues to perform very strongly, highlighting significant underlying dispersion and opportunity.

Quantitative models relying on momentum in equities, commodities, and rates are underperforming because the performance gap (dispersion) between assets has collapsed. This creates a low-conviction environment unfavorable for relative value trades and non-carry macro trends in the FX market.

The absence of key data releases like non-farm payrolls during a government shutdown reduces market-moving catalysts. This artificially lowers volatility, creating a stable environment conducive to running carry trades and maintaining existing positions like dollar shorts, contrary to expectations of increased uncertainty.

The most effective FX expression of the AI theme is through carry strategies, not by picking individual currencies. FX carry shows a high correlation with AI-beneficiary equity sectors like tech and energy. This allows a broad basket of high-yield currencies to outperform as a group, even those without direct AI exposure.