Global Markets Analyst Finding Factors in FX Markets

Economics Research 17 August 2026 | 4:08PM BST

n Capturing global macro themes with baskets of currencies is a key approach used Stuart Jenkins | to study and trade FX markets. This type of analysis generally falls into one of two Goldman Sachs International camps: baskets systematically constructed as trading strategies, or baskets geared towards tracking the performance of broad ‘groupings’ of currencies in a purely descriptive sense. Our focus here is mostly on the latter of these two camps, in explaining the cross-section of currency performance using thematic macro ‘factors’ rather than necessarily delivering strong vol-adjust returns on a standalone basis. n We construct a series of FX factors (Carry, Equity Risk, National Debt, NIIP, Energy and Metals Commodities, and Mean Reversion) by applying time-varying weights to 26 currencies, including the US Dollar. For all of these factors, even when optimising the weights for vol-adjusted returns, the full-sample Sharpe ratios are unimpressive. But the factors do respond intuitively to different macro regimes, and it is through this lens that we think the performance of these factors (and of their constituents) is best understood. n Many of these factors are highly correlated with one another, and offer exposures to similar macro themes. But within those strong correlations, there are often currencies that run against the grain of the typical relationships, and in practical terms, these often produce the most interesting hedging and trading opportunities for FX markets. n By loading on currencies that exhibit a better trade-off across two factors, we construct ‘blended’ factors that optimise for balanced exposures across multiple themes. These blended factors can behave differently to their two constituent factors, and in some environments can outperform both. We show that this is the case for a Carry/Risk-Off blend during periods of moderate equity drawdowns, and for a Carry/NIIP blend to benefit from capital retrenchment in periods of correlation breakdowns in US assets. We also find that blending Carry with Mean Reversion can help to improve total vol-adjusted returns.

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Goldman Sachs Global Markets Analyst

Global macro themes often dominate domestic economic trends in shaping the direction of FX markets and global capital flows. Capturing these global themes with baskets of currencies has long been a part of our analysis of FX markets, and is an approach that is richly covered in the academic literature and often used by market practitioners.

This type of currency basket analysis generally falls into one of two camps. The first is baskets of currencies systematically constructed as trading strategies – be it through harvesting FX market risk premia (e.g. carry, variance risk premium), following market technical signals (momentum, valuation, positioning), or macro fundamental signals (growth outperformance, monetary policy divergence). The second is baskets geared towards tracking the performance of broad ‘groupings’ of currencies in a purely descriptive sense – such as across regions (e.g. performance of Asia versus LatAm FX) or market themes (high yielders vs low yielders). As we explore in more detail below, our focus here is on the latter of these two camps: in explaining the cross-section of currency performance using thematic macro ‘factors’ rather than necessarily delivering strong vol-adjust returns on a standalone basis. We briefly explore how different concentrations of the currency weights of these factors affect average performance in the appendix of this piece, but our main focus is on the performance of these factors under different macro environments, and what that can inform us about individual currencies.

Our analysis below leans on both the existing academic literature and our own prior body of work – both of which cover the two camps of FX basket analysis. Our previous work on developing descriptive baskets of currencies dates back to 2005, where we explored…