For Big Returns, Think Small

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Smaller G20 currencies have outperformed the big four all year, and this strategist sees the trend continuing.

Admit it - you've been obsessing over the euro's tiniest moves this year. But if you glance up for a minute, you might see that you've been watching the wrong currency.

"We obsess about EURUSD on a minute to minute basis; when not doing so we debate whether JPY is headed for the collapse that has been expected for many years, but never quite achieved. The truth is that being long the “G20 smalls” and short the G4 “bigs” has provided a consistently better risk return profile so far this year," says Steven Englander, head of G10 currency strategy at Citigroup.

Englander has analyzed the average (unweighted) performance of eighteen currencies - the Australian, New Zealand, Taiwan, Singapore, and Canadian dollars, the South African rand, the Norwegian krone, the Swedish krona, the Mexican, Argentinian, and Chilean pesos, the Indonesian rupiah, the Indian rupee, the Russian ruble, the Turkish lira, the Brazilian real, the Chinese yuan, and the Malaysian ringgit - and measured their performance against the average of the dollar, euro, yen, and British pound.

"The smalls have the highest return relative to their realized volatility so far this year," Englander says. "No G10 currency cross had a better return relative to realized volatility."

One reason for the better performance among smaller countries is the liquidity added to the market by the likes of the European Central Bank and the Bank of Japan. Those moves have boosted risk appetite, and to the extent they have stabilized the global economy, they have arguably improved the economic prospects for the smaller countries in the G20 - and their currencies.

Englander cautions that trading this view is expressing a clear belief that risk-on assets will outperform, and he also warns that it's prudent to buy a basket of G20 currencies to limit your exposure to risks like single-country monetary policy moves. But if he's right, you could have a nice ride - and you could let that euro obsession go.

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