This blog covers the general topic of financial markets.


55 Currencies of the World: Long Term Appreciation

first posted: 2024-02-27 03:25:33.298376

As I am doing some accounting statistical research, I wanted to check the long term trend of the currencies used for financial statements of listed companies.

This link has the currency log trend lines for all currencies used by companies listed on major exchanges. Using the logarithm of the exchange rate enables us to visualize compound return as a linear change, which helps understanding long term returns.

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Categories of Currency

  • the majors: CNY, EUR, JPY, GBP, CAD, AUD, CHF, ... drift by +1% to -1% annual around USD with std dev around 7%
  • pegged currency: AED, BHD, HKD, ... drift by 0 with a standard dev of less than 1%
  • inflating currency: from the MXN at 3% per year to ARS and TRY which devalue more than 20%

It should be noted that many of the inflating currency have highly irregular trajectory, like a -4% trend period followed by a deep nosedive, resulting in an average -10% long term annual performance. The volatility of such currency is similar to that of a stock, except it only goes down.

Only the Swiss Franc is trending up in dollar, but the long term trend is only 1%. The SNB is devaluing its currency to follow the USD. They tend to print CHF for buyers and buy US stocks with the USD they get.

Currency appreciation vs total return: Carry cost

The currency appreciation is only one component of the long term total return. One "earns" 1% annually holding Swiss Franc through long term currency appreciation (with a significant standard deviation of +/- 7%), but one can earn 5% on US treasury bills and only 1.75% in Swiss Franc.

Holding the USD therefore has higher carry, and CHF looks like a lottery ticket (high risk and negative expectation) to a US investor.

The following graph shows 36 month fx trend vs carry (excl margin) obtained from Interactive Brokers. The trend midpoint and $+- 1 sd$ error bar is shown as a line for each currency. The points below the line $y=-x$ are currencies that should be shorted whereas the points above are currencies that should be bought:

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We see the following possible carry strategies: either go long refuge currencies that pay much less carry than the USD but do not appreciate, or short some bad currencies that pay more than the dollar, but depreciate faster. Of course, market trends can turn very quickly, and many CHF carry investors were wiped out on a sudden EUR depeg.