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.

With foreign exchange implied volatility at five to six-year lows, traditional directional bets are less attractive. The carry trade, which profits from interest rate differentials, has consequently become the 'only game in town,' delivering strong returns as investors search for yield in an unusually calm market environment.

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.

In an environment of coordinated global central bank tightening led by the Fed, the most resilient G10 currencies are those with high yields. Currencies like the Norwegian Krone, British Sterling, and Australian Dollar are expected to outperform lower-yielding peers due to their attractive carry and better insulation from rising US yields.

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.

Widening French OAT bond spreads are not yet priced into the euro, skewing its fair value lower toward 1.06 against the dollar. Strategists see high conviction in replacing traditional low-yielding funders with the euro to fund pro-cyclical carry trades while global growth remains resilient.

Carry trades are experiencing a rotation in funding legs rather than an outright unwind. Strategists suggest shifting funding away from squeezed low-yielders like the Swiss Franc and Swedish Krona toward the Euro, while repurposing the Swiss Franc as a tactical hedge against broader cyclical carry risk.

From a systematic trading perspective, Sterling (GBP) holds a unique position among G10 currencies. It is the only one that allows investors to earn significant carry (yield) without the high sensitivity to commodity price swings (terms of trade) that affects currencies like the Norwegian Krone or Australian Dollar, making it a distinct choice for yield-seeking strategies.

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.