Consensus FX Trades Return (Short EUR/USD and AUD/USD)

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

Summary

• Rates momentum models (+0.3%) added to last week’s gains but failed to garner further strength for equities (-0.3% WoW) and FX (-0.6% WoW).
• They have performed best in rates over the past three months (+7.4%), mostly driven by gilts (+17.6%). FX also fared well (+3.0%).
• Momentum models pared S&P 500 bearishness but returned strongly bearish on EUR/USD and AUD/USD. They also turned bullish on DAX and the FTSE-100.

Latest Signals

Equity momentum models turned less bearish on the S&P 500 and turned bullish on DAX and FTSE-100 (Chart 1 and Table 1). They remained bearish on the Nikkei.

Momentum models turned less bearish on JGBs and Bunds. Meanwhile, they continue to be strongly bearish on US rates and bearish on long Gilts.

Within FX, consensus trade signals are returning (strongly bearish EUR/USD and AUD/USD) while they also turned strongly bullish on EUR/SEK and USD/CAD (Chart 2 and Table 2).

Model Performance

Momentum models outperformed for rates (+0.3% WoW), performing best for US long bonds (+0.9% WoW). Meanwhile, they registered negative returns for equities (-0.3% WoW) and FX (-0.6% WoW).

Over the past three months, momentum models have performed best for rates (+7.4%), even if you factor out the gilts momentum model (+17.6%). They performed second best for FX (+3.0%) and struggled for equities (-2.2%).

Our Views

The GOP fell short in the House while its margin grew smaller in the Senate – Dominique has discussed what market-moving political surprises could come next. However, the Federal Reserve (Fed) remains at the forefront; Dominique expects today’s US CPI to support her view for the Fed to hike by 75bp in December, before reaching an 8% terminal rate. However, markets are leaning toward 50bp in December (58bp priced). It means there is risk for further 2s10s curve inversion – we entered a (equal-duration weighted) 2s10s flattener (target: -100bps). It also means the Fed remains underpriced vs the Bank of Canada.

Markets are mispriced in Europe too. Henry expects another 75bp European Central Bank hike on 15 December – there is value in paying short-end EUR swaps – while he believes the Bank of England (BoE) will not be able to muster the courage to hike as the market expects – there is value in positioning for a lower BoE terminal rate, alongside gilts curve steepening. He has also looked at the impact of the UK mortgage market on consumers and UK businesses.

Turning to FX, we remain short EUR/USD (target: 0.90). Remaining in Europe, GBP/CHF has turned lower while EUR/NOK has begun to climb towards year highs. We have also kept a stern eye on AUD. We think AUD/NZD could reach 1.05 while we remain bearish on AUD/USD and AUD/CAD.

*The basic strategy is to use returns (lookback windows) to give buy/sell signals. So, if the US stocks are up over the past 3 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.

(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.)