US economy in expansion phase: The BBVA US Macro Indicator was highlighting elevated recession risks at the start of 2Q, but the latest reading for July suggests that the US economy has entered the expansion phase. This was further evidenced during the most recent earnings season, with 80% of US corporates beating estimates. Our optimistic reading is in contrast with the latest jobs report, which showed muted job creation below market expectations. Nonetheless, the PMI reading and sticky wage data suggest supply rather than demand weakness in labour markets.
Loose getting looser: Fed Chair Jerome Powell’s recent Jackson Hole speech has driven market expectations that the Fed will restart its cutting cycle in September. Furthermore, the fiscal stimulus facing the US economy from the “One Big Beautiful Bill” – which consensus expects will boost US GDP by up to 0.5% – and potentially tariff-funded fiscal cheques is likely to spur a continuation of risk-on sentiment. Cross-asset volatility has been on a downtrend since peak levels in April. We believe supportive fiscal policy combined with less restrictive monetary policy will keep financial conditions in check in the near term.
Keep calm and FX carry on: The current environment of loose financial conditions and an expansionary growth regime has historically been favourable for FX carry strategies. The best time to enter these strategies is when emerging from a recession. We initiated our positive view on the FX LatAm carry strategy back in April when we were just coming out of the trough in risky assets. Since then, the FX LatAm carry strategy has delivered the best returns across our suite of risk premia strategies.
Other sources of carry: In this note, we investigate the outlook for the traditional and most popular carry strategies across asset classes. In our analysis of cross carry comparisons, the FX carry strategy continues to stand out. The commodity carry strategy ranks as the second best, although its performance in the post-COVID world of higher inflation has been challenging, making us cautious. The credit carry ranks as the worst, given already tight spreads currently.
Trade of the month: FX LatAm carry – in multiple publications this year (Risk Premia: After Liberation Day – 23 April 2025, and Risk Premia: Keep calm and carry on! – 10 June 2025), we highlighted our preference for the BBVA FX LatAm carry strategy. FX carry has been the best-performing strategy since Liberation Day – in particular the LatAm carry strategy.
EM FX has room to run against non-USD FX: The BRL and MXN have appreciated by 14.1% and 9.4%, respectively, against the USD since the start of the year, while the performance of LatAm currencies vs. our basket of lowest-yielding currencies shows that the MXN has depreciated by 0.3% and the BRL by just 4.6% year to date. The bearish view on the USD has become well documented, as has consensus as a result, and we see room for the FX carry trade to play out within non-USD currencies.