With both US and European economies growing robustly, the direct EUR/USD currency pair is largely neutralized. A more effective strategy to gain exposure to Europe's strengthening growth is by investing in higher-beta, pro-cyclical currencies like the Scandinavian Kroner, which are less impacted by broad US dollar movements.

The Swedish Krona (SEK) has shifted from a cyclical currency to a funding currency, behaving more like the Japanese Yen. This is because Sweden's central bank is notably more dovish than its G10 peers after a string of below-target inflation prints, making the SEK attractive to borrow against.

A world of persistent inflation and hawkish central banks creates a prime environment for carry trades, even with moderating growth. Within the G10, currencies of energy exporters with high yields, like the Australian Dollar and Norwegian Krone, are particularly attractive. Their carry advantage over the US dollar is at its highest level in nearly a decade.

The Swiss Franc is exhibiting a split personality: strengthening against the dollar and euro as a haven for US equity outflows, while simultaneously underperforming high-beta currencies like the Aussie and Norwegian Krone amid a strong global growth backdrop. This dichotomy requires a nuanced trading strategy.

A strengthening US dollar doesn't negate the FX carry trade. The optimal strategy shifts to using low-yielding currencies like the Euro, Swiss Franc, or Yen as funders to buy high-yielders, insulating the trade from direct USD strength and capturing cross-currency differentials.

The Swedish Krona (Stocky) recently benefited from a pro-cyclical environment and capital repatriation, making it a market favorite. Now, its status as an energy importer combined with a potential reversal of the global growth story has completely changed its outlook, making it vulnerable despite potentially hawkish central bank policy.

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.

A notable divergence has appeared in carry strategies. While popular Emerging Market (EM) carry baskets have suffered moderate losses, G10 carry factors have been remarkably strong, gaining 4% since early April. This G10 performance is highly concentrated in a few positions (long AUD/NOK, short JPY/SEK) that are benefiting from multiple tailwinds simultaneously.

With FX volatility at multi-year lows, traditional volatility-selling strategies are not recommended. Instead, the optimal approach is to use options to exploit specific currency pairs with exceptionally high carry-to-volatility ratios, such as Sterling/Swiss, for superior alpha generation.