Momentum Models Pare USD Bullishness

When evaluating the performance of our momentum models we are considering the average performance across the one-, three-, and 12-month momentum models.

Summary

• Momentum models (-0.5% WoW) are yet to recover, performing worst in equities (-1.0%), then FX (-0.6%) and rates (-0.1%). They have struggled through 2023.
• Overall returns were marginally better in the FX carry strategies we follow.
• Momentum models have pared S&P 500 bearishness and turned net-bullish on rates, EUR, JPY and GBP.

Latest Signals

Equity momentum models have pared S&P 500 bearishness and flipped net-bullish on the Nikkei as the three- and one-month lookback model flipped to signal ‘buy’, respectively (Chart 1 and Table 1). They remain bearish on the FTSE-100.

Momentum models are net-bullish rates as the three-month lookback models for the US 5Y and 10Y flipped to signal ‘buy’. JGB bullishness was pared.

FX momentum models turned net-bullish EUR, JPY and GBP (vs USD) and pared NZD bearishness (Chart 2 and Table 2).

Model Performance

Momentum models (-0.5% WoW) struggled for a second week running with pain felt most in equities (-1.0%), then FX (-0.6%) and rates (-0.1%). Momentum models for the DAX (+1.5%), US 10Y (+0.3%), JGBs (+0.4%) and EUR/CHF (+0.3%) proved the only bright spots.

Our Views

The Federal Reserve (Fed) hiked by 25bp on Wednesday. The Fed is hoping for banking volatility not so hot it would lead to a full crisis but still hot enough to reduce the need for Fed hikes. In practice, banking crises tend to be either full on or not happen at all, so the federal funds rate is likely to get cut much more than the market is pricing or hiked much more than the Fed is envisaging. Because the US banking system is generally well capitalized, the likelihood of a full crisis seems low. We continue to believe that Fed cuts are overpriced.

*The basic strategy is to use returns (lookback windows) to give buy/sell signals. So, if the US stocks are up over the past three months, you buy, otherwise, you sell (note I use excess returns).

Bilal Hafeez is the CEO and Editor of Macro Hive. He spent over twenty years doing research at big banks – JPMorgan, Deutsche Bank, and Nomura, where he had various “Global Head” roles and did FX, rates and cross-markets research.

Ben Ford is a Researcher at Macro Hive. Benjamin studied BSc Financial Mathematics at Cardiff University and MSc Finance at Cass Business School, his dissertations were on the tails of GARCH volatility models, and foreign exchange investment strategies during crises, respectively.

Photo Credit: depositphotos.com

(The commentary contained in the above article does not constitute an offer or a solicitation, or a recommendation to implement or liquidate an investment or to carry out any other transaction. It should not be used as a basis for any investment decision or other decision. Any investment decision should be based on appropriate professional advice specific to your needs.)