to be resolved by the finance community: future exchange rate changes do not move
one-for-one with interest rate differentials across countries and in fact they are usually
negatively related. This empirical evidence allows the investment community to create
naïve carry trade strategies consisting of going short in low yield currencies and long
in high yield currencies. We show that the US TED spread, the US average forward
discount, the currency carry trade return itself, the VIX and the CRB Industrial return
are crucial to set optimal parametric currency carry trade strategies in order to avoid the
downside and crash risk associated to the usual carry trades. The optimal currency carry
strategy is also found to be affected by a simple measure of global monetary policy
especially in periods of dovish monetary policy.