Currency Rotation
| Currency | Similar ETF | ETF Ticker | Total Rank | Interest Rate Rank | Valuation Rank | Momentum Rank |
|---|---|---|---|---|---|---|
| Swedish Krona | CurrencyShares Swedish Krona Trust | FXS | 1 | 2.5 | 6 | 1 |
| U.S. Dollar | iShares Barclays Short Treasury Bond | SHY | 2.5 | 6.5 | 1 | 3 |
| Euro | CurrencyShares Euro Trust | FXE | 2.5 | 4.5 | 4 | 2 |
| Canadian Dollar | CurrencyShares Canadian Dollar Trust | FXC | 4 | 2.5 | 5 | 5 |
| Great Britain Pound | CurrencyShares British Pound Sterling Tr | FXB | 5 | 4.5 | 3 | 6 |
| Australian Dollar | CurrencyShares Australian Dollar Trust | FXA | 6 | 1 | 7 | 7 |
| Japanese Yen | CurrencyShares Japanese Yen Trust | FXY | 7 | 8 | 2 | 8 |
| Swiss Franc | CurrencyShares Swiss Franc Trust | FXF | 8 | 6.5 | 8 | 4 |
As of 06/03/2013
The currency rotation strategy is our method for identifying developed market currencies that are likely to appreciate. It combines valuation, momentum, and yield strategies into one system for currencies. Because strategies sometimes undergo periods of underperformance, combining several uncorrelated strategies can help raise returns while lowering risk.
Methodology
First, we sort the currencies by the sub-strategies. We use purchasing power parity to measure valuation, the previous 12 month return to measure momentum, and the central bank rate to measure yield. The top currency in each sub-strategy gets a score of 1, the next one is assigned a score of 2, and so on. The final rankings are determined by sorting the sum of the scores they received from each sub-strategy.
How to use the Currency Rotation strategy
One way to use this strategy would be to buy the top two or three currencies and sell the bottom few currencies in a forex account. Forex accounts generally come with leverage, so it would be possible to earn higher returns this way as long as the leverage used is not more than 2x.
Another method is to buy the corresponding ETFs to the top two or three currencies in a brokerage account. This is a simple way for stock or ETF investors and is a great way to hedge against a decline in the dollar and to add diversification.
