Currency value

Checked October 2026

Currency value buys currencies that look cheap against a five-year purchasing-power comparison and sells the ones that look expensive. Asness, Moskowitz and Pedersen published value across markets in the Journal of Finance in 2013. Backtoast ran the currency version. This version failed our test, losing 15.2% a year over 36 trades.

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Currency value

Purchasing power here is the exchange rate adjusted for inflation in the two countries. A currency that's fallen in real terms over about five years scores as cheap, and each month the rule buys the three cheapest and sells the three dearest.

The run compared today's rate with the single rate five years ago, where the paper averages the rates from four and a half to five and a half years ago. It also ranked the pairs as quoted, so its six picks can differ from a ranking of the currencies themselves.

Currency momentum is close to the opposite bet, buying the currencies that rose most over the last month.

When it works

Currency value is a slow mean-reversion trade, because exchange rates drift back toward purchasing-power parity (PPP) over years, so it pays over long holding periods and loses while a cheap currency keeps getting cheaper. Asness, Moskowitz and Pedersen found value and momentum negatively correlated, so value tends to pay when momentum loses. That's why it usually runs next to carry and momentum in a currency portfolio rather than on its own.

Origins

Asness, Moskowitz and Pedersen's Value and Momentum Everywhere reported 3.3% a year for the currency version from 1979 to 2011, interest gap included. The run used nine currencies against the dollar, from late 2021 to October 2026.

The run is Backtoast's, from 29 October 2026, after costs.