Citi's currency guru Steven Englander is out with a clever note about the state of global currency markets.
First he notes that people get really caught up in the weeds thinking about the the euro vs. the dollar or the dollar vs. the yen, and they hang on every word of everyone in central banking, trying to figure out which major nation is going to pump liquidity next, weakening this or that currency.
The questions traders ask are endless: Will the Fed ease at the next meeting? Will it ease at the meeting after that? What about sterilized QE? What will that do the dollar? Will the BoE pump more? Have we seen the last of the rate cuts from the ECB? Will the Bank of Japan stick to its inflation target, or was this a one-off deal?
But rather than trying to play this game, Englander notes a much bigger, simpler trend.
The "small" currencies are crushing the bigs.
Specifically, basket consisting of The Aussie dollar, Canadian Dollar, South African Rand, Norwegian Kroner, Swedish Kroner, New Zealand Dollar, Singapore Dollar, Taiwanese Dollar, Colombian Peso, Indian Rupee, Indonesian Rupiah, Russian Ruble, Turkish Lira, Argentine Peso, Brazilian Real, Mexican Peso, Chinese Yuan, and the Malaysian Ringgit has clobbered a basket of the bigs: The Dollar, the British Pound, the Euro, and the yen.
G20 smalls outperform the G4
The basic gist of this trade, says Englander: "It is a way of being agnostic on which G4 will be the major liquidity provider to the world and which region faces the strongest headwinds, but it reflects a view that enough liquidity will be provided by the G4 to generate a generally risk-on tone to global asset markets."