Momentum Models Remain Bullish USD Ahead of NFP

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 add to last week’s fortunes (+0.5% WoW), performing best in FX (+0.9%) and equities (+0.7%).
• Overall returns were similarly positive over the past three months (+1.3%) but fall short of FX carry strategies.
• Momentum models point towards US equity underperformance and USD outperformance. Meanwhile, rates are expected to sell off.

Latest Signals

Equity momentum models expect US equities to convincingly diverge from Asian and European equivalents with signals intensifying for the Nikkei and remaining net-bullish on the DAX and FTSE -100 (Chart 1 and Table 1).

Momentum models remain bearish on US, UK, German and Japan rates without a bullish signal in sight.

FX momentum models upped their EUR/USD and AUD/USD bearishness while they increased their USD/CAD bullishness (Chart 2 and Table 2).

Model Performance

Momentum models pushed higher (+0.5% WoW), adding to the past two week’s gains. They performed best in FX (+0.9%) and equities (+0.7%), and worst in rates (-0.2%). Performance has proven positive over the past three months (rates: +1.9%; equities: +1.3%; FX: +0.8%) but has fallen short of 6.0% returns in our FX carry strategies over the same period.

Our Views

The Federal Reserve could be set to return to 50bp hikes following a hawkish Chair Powell testimony, despite having only just slowed to 25bp at the previous meeting. As it stands, Dominique believes it will take nonfarm payrolls above 250,000 with signs of labour market tightness (e.g., no increase in participation, faster wage growth) and/or core CPI above 0.4% MoM for a return to larger hikes.

In contrast, Henry continues to expect the Bank of England (BoE) to pause at their 23 March meeting, but notes the risk of another hike. Given the focus is set on whether hard data releases beat MPR expectations, Henry will focus on the labour market (14 March) and inflation (22 March) data, and the Spring Budget (15 March).

*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.)