[cppene]

“Past performance is not indicative of future returns” is an often heard disclaimer in the investment world. In theory and intuitively, it makes sense. In “normal” market conditions, we would expect this to always hold true. But after cycles of extreme volatility, as we have seen in currency markets, the “mean-reversion” theme becomes a pertinent one. Specifically, do the worst performing currencies necessarily become the best performing? Of the 5 G10 currencies highlighted as worst performers, 4 appear in the best performers also, though in a somewhat different order. The exception in this case is the British pound (GBP) that underperformed massively but has yet to catch up with its peers. So, in a sense, past performance has provided some clues to future returns. Of course, these are exceptional observations during exceptional times. That said, there is another inference that can be drawn. These observations support the idea that currency investors have so far focused on “value” rather than “growth”. Once the value trades have reverted or become exhausted, the natural progression would be to seek “growth” – currencies that are typically the most sensitive to global trade. Hence once the mean reversion correction matures, the focus is likely to shift back towards more traditional, fundamental valuation for currencies.