Momentum Models Pare EUR/USD Bullishness and Turn Bearish on 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

• Momentum models stumbled after six weeks of positive returns with equity (-0.3% WoW) and rates models (-0.4% WoW) faring worse than FX models (0.0% WoW).
• Performance is better over the past three months with equities driving the average return higher (+5.7%).
• Since our last update, momentum models have flipped marginally bullish on the FTSE-100 and become increasingly bearish on US long bonds. Meanwhile, in FX, they pared EUR/USD bullishness and flipped marginally bullish on EUR/CHF and marginally bearish on AUD/USD.

Latest Signals

Equity momentum models turned slightly bullish on the FTSE-100, with the one-month lookback model joining the 12-month lookback model in signalling ‘buy’ (Chart 1 and Table 1). Equity momentum models remain bullish on the S&P 500, Nikkei and DAX.

Meanwhile, rates momentum models became even more bearish on US long bonds – they are heavily bearish US rates, alongside bunds and gilts.

Within FX, momentum models pared EUR/USD bullishness and flipped marginally bullish EUR/CHF and marginally bearish AUD/USD (Chart 2 and Table 2).

Model Performance

Momentum models struggled over the past week after six weeks of positive returns; equity (-0.3% WoW) and rates momentum models (-0.4% WoW) underperformed a mix set of FX momentum models (0.0% WoW; Charts 3, 4 and 5). Performance over the past three months, however, remains positive (equity: +5.7%; rates: +0.8%; FX: +0.6%).

Our Views

Markets are pricing 30bp more of Federal Reserve (Fed) hikes this year, below Dominique’s expectations for a July and November hike. And, in her latest weekly, Dominique demystifies M2 contraction, finding that it is neither recessionary nor disinflationary. And, as a result, markets are overestimating Fed 2024 rate cuts.

Across the pond, the Bank of England (BoE) hiked the policy rate by 50bp to 5.0%, against consensus expectation. Despite the hawkish move, Henry is unconvinced the BoE will hike to market pricing (currently pricing at least 6.0% terminal). And while he is waiting for entry to the trade, he sees value in positioning for a re-anchoring of long-term UK inflation expectations through being short a 10Y inflation swap.

*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.

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.)