Yesterday’s Wall Street Journal reported foreign-exchange currency trading volume at over US $4.0 trillion per day. [See "Currency Trading Soars"] While the ETF currency tracking indices have neither the volume, round-the-clock possibilities, nor the narrow spreads, they do make for convenient means of testing various currency pairs performance.
Before running ETF Rewind tests, I hypothesized that the trending characteristics of currencies would make this a difficult enterprise. However, after a little perseverance and over 100 combinations later, it turns out that with sufficient volatility, currencies moving in tandem still present opportunity….
Is it a surprise that the fast moving Japanese Yen (FXY) has recently presented one of the better matches? The chart above highlights the pairings with the best return/equity curve linearity combination over the last six months, including, among others, FXY : BZF/ BNZ & CEW, all characterized by back-tested returns exceeding twenty percent and returns linearity approaching 90%.
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