Characterizing carry Efficient carry strategies involve buying and selling dynamic portfolios of currencies with certain risk characteristics. Carry strategies are supposed to work better over long investment horizons, so that the cushion provided by the carry compensates for the currency volatility through mean reversion. Here, we analyze carry from a different perspective, as our goal is to identify standalone attractive carry opportunities. We define the investment horizon to end 1Q17. We sort currencies based on risk-adjusted carry. We then characterize the factor exposure of currency returns, isolating global and idiosyncratic sources of risks, in order to identify smart carry trades that are not highly exposed to a massive re-pricing of global factors, such as US rates, USD, commodity prices and global risk aversion. We identify carry trades that have low exposure to global factors, in particular the USD factor, and offer attractive risk-rewards. Not surprisingly, purely based on carry considerations, EM currencies appear more attractive than DM ones, which are mostly candidates for funding currencies. However, carry trades returns are highly volatile, exhibit negative skewness and fat tails. Even controlling for different measures of risk such as volatility or maximum drawdown, and according to this criteria only, we find that EM currencies are the most attractive, in particular ARS, BRL in LatAm, RUB, TRY and ZAR in EEMEA and INR, IDR and CNY in Asia (Chart 63). Even though volatility and drawdowns can be useful measures of risk, they don’t say much about the exposure to different risk factors. Since carry trade strategies are usually very sensitive to global factors, we study the cross sectional exposure of currencies to key global factors: commodity prices, global risk aversion and US yields (as a proxy of global yields}. We report the R2 of regressions of two years of weekly returns on the above mentioned global factors, for the last two years and the yea