Abstract
Past trends in a broad range of fundamental variables predict currency returns. We document that a trading strategy that goes long currencies in countries with strong economic momentum and short currencies in countries with weak economic momentum exhibits an annualized Sharpe ratio close to one and yields a significant alpha when controlling for standard carry, momentum, and value strategies. Moreover, the economic momentum strategy subsumes the alpha of carry trades, suggesting that interest rate differentials are captured by past economic trends. Finally, we find that investors' expectations of fundamentals relate positively with recent trends in fundamentals across countries and variables.