FX Momentum Model Fortunes Return

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

Summary

• FX momentum models (+0.2% WoW) snapped out of their losing streak, though models were mixed in equities (+0.0%) and underperformed across rates (-0.3% WoW).
• Performance has been poor over the past three months across all three asset classes we track (equities: -0.9%; FX: -1.9%; rates: -2.0%).
• The models point towards further positive equity performance, with FTSE-100 top of the pack, while JGBs and bunds are forecast to underperform USTs and gilts. Elsewhere, the models turned bullish EUR/CHF.

Latest Signals

Equity momentum models remained net-bullish across all models (Chart 1 and Table 1). The buy-signal for the FTSE-100 sits as the strongest.

Meanwhile, momentum models turned net-bearish on bunds (which joined JGBs) and remained net-bullish on US rates and gilts.

Within FX, momentum models have turned net-bullish on EUR/CHF, reversing last week’s change to net-bearish (Chart 2 and Table 2).

Model Performance

FX momentum models (+0.2% WoW) snapped out of their losing streak, while equity momentum models (+0.0%) were mixed (outperforming on the S&P 500 and Nikkei, underperforming in the DAX and FTSE-100) while rates models dropped (-0.3%). Over the past three months, momentum models have underperformed across all three asset classes (equities: -0.9%; FX: -1.9%; rates: -2.0%).

Our Views

Things are heating up. The Federal Reserve (Fed), European Central Bank (ECB) and Bank of England (BoE) have their first decisions to make of 2023.

Dominique expects a 25bp hike at the 1 February FOMC meeting, alongside consensus. Since the December 2022 meeting, the macro backdrop of lower inflation and strong employment growth has decisively validated neither hawks nor doves. Therefore, Dominque expects Chair Jerome Powell to link any possible policy changes to the economy’s deviations from the December 2022 SEP trajectory because that is the de facto compromise between hawks and doves.

A day later, Henry expects the ECB to deliver another 50bp hike on 2 February – they have already hiked the deposit rate by 250bp in this cycle. Moreover, he expects they confirm the need to hike beyond market expectations (to 3.5% or higher), coming after a slate of hawkish comments.

In the UK, Henry will have his hands busy with the BoE expected to deliver their own 50bp hike (45bp priced). However, in contrast to the ECB, he expects continued dovishness in forecasts and stronger guidance that the end of hiking is near, despite recent data having not supported a BoE pivot as well as he had expected. Meanwhile, recent comments from Governor Bailey did not endorse the priced 4.5% terminal, but also did not actively push back on it either. In Henry’s mind, that leaves my expectation for a 4-4.25% terminal rate in play still.

The Bank of Canada preluded the busy week. They hiked by 25bp, as Ben expected, and proposed a conditional pause in March. Ben expects a pause is likely delivered, given a resumption of hiking would take an accumulation of evidence – review to follow.

*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.)