Momentum Models Flat as Equities Underperform Rates and FX

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 were flat over the past week, with equity models down 0.1% WoW, rates up 0.2% WoW and FX unchanged WoW.
• FX momentum models are the best performing over a three-month timeframe (+0.6%).

Market Implications

• Momentum models remain extremely bearish EUR/USD. This week, we noted the range in EUR/USD is shrinking, arguing we need a Fed surprise or equity shock to break the range.

Latest Signals

Equity momentum model signals have shifted slightly over the past week. The S&P 500 (very bullish) and DAX (slightly bearish) signals are unchanged, the Nikkei has flipped from very bullish to slightly bearish, and the FTSE signal has gone from very bullish to slightly bullish (Chart 1).

Rates momentum models have also shifted a little – momentum signals across the curve in US rates are all slightly bearish, as are JGB signals. Meanwhile, bunds have flipped from slightly bearish to slightly bullish, and gilts remain slightly bullish. Bilal argues this week that trading US Rates is all about ‘event days’ such as Fed days, CPI days, payrolls days.

Turning to FX, momentum models’ views have shifted slightly as with equities and rates. While EUR/USD (and the other EUR crosses’) signals remain very bearish and USD/JPY very bullish, GBP/USD has gone from slightly bearish to very bearish, EUR/CHF from very bearish to slightly bearish, USD/CAD from very bullish to slightly bullish, and NZD/USD from slightly bullish to slightly bearish. AUD/USD remains slightly bullish.

Ben reiterated his view this week USD/JPY remains a buy-on-dips, with Bilal also looking at the ‘Norinchukin effect’ and how it may be partly behind why USD/JPY has been trading so high relative to rate differentials.

Model Performance

• Momentum models were flat over the past week, with equity models down 0.1% WoW, rates up 0.2% WoW and FX unchanged WoW.

(Charts 3 to 5: orange bars are average returns of CTA model over past three months by asset, black dot is change over the past week).

*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).

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Richard Jones writes about FX and rates markets for Macro Hive. He has traded and invested in interest rate and FX market portfolios spanning three decades, both on the buy-side and sell-side.

(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.)