Let the trend be your friend: The majors

Currencies long have enjoyed a reputation for trending, and with good fundamental reasons. Not only do currencies reflect long term national policies and tendencies that are slow, if not impossible, to change (really, should we expect Switzerland and Argentina to be confused at any point?), they reflect relative monetary policies that also tend to persist.

Two cases in point: The U.S. dollar strengthened for almost five years in the first half of the 1980s after Paul Volcker instituted his policy of high interest rates. The greenback fell just as spectacularly, and for an even longer period of time, after May 2002 under the weight of a deliberate policy by the Federal Reserve to solve all economic problems with easy credit.

We can throw darts at a world map, start narrating the history of the country hit, and arrive at pretty much the same conclusion: Currencies are capable of posting massive long-term trends. And as any position trader understands intuitively, almost any trading system or set of indicators works in a trend. Markets make indicators work, not vice-versa.

Two questions arise, then. First, if this is the case then why do self-described trend-followers in currencies tend to have such mediocre performance (see “Why currency traders should be humbler,” May 2007 or “Currencies and commitments,” June 2008)? Second, which currencies are in fact trendiest?

The first question will be dismissed curtly with this bit of doggerel: “The trend is your friend, except for the bend in the end.” Everyone can see the same trend, the trade gets crowded, and then it reverses in an execution vacuum capable of vaporizing — in a matter of hours — weeks of hard-won gains. Such is the life of a trend-follower.

The second question will be addressed for a set of six major currencies: the Canadian and Australian dollars (CAD and AUD), the Japanese yen (JPY), the Swiss franc (CHF), the British pound (GBP), and the Euro (EUR). We will visit a set of minor currencies next month.