Momentum Models Turn Heavily Bearish on EUR/CHF

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 as gains in rates (+0.4% WoW) were offset by losses in equities (-0.3% WoW) and FX (-0.1% WoW).
• Performance over the past three months remains marginally positive (+1.0%), due to strong equity momentum model performance (+5.2%).
• Since our last update, momentum models have turned heavily bearish on rates and EUR/CHF, and pared EUR/USD bullishness.

Latest Signals

Equity momentum models have pared FTSE-100 bearishness back from heavily bearish to marginally bearish (Chart 1). They remain heavily bullish on the S&P 500 and DAX.

Meanwhile, rates momentum models have turned even more bearish on the US 10Y, bunds and gilts. This aligns with heavily bearish signals for the US 5Y, US long bonds, and JGBs.

Turning to FX, momentum models are less convinced of a EUR/USD rally as it pulled back from 1.12, and instead thinks EUR/CHF has further to fall as the SNB continue to sell foreign FX (Chart 2). And in the $-bloc, signals flutter: they turn marginally bullish on AUD and CAD and marginally bearish on NZD (vs USD).

Model Performance

Rates momentum models (+0.4% WoW) were the only ones to deliver a positive return over the past week, led by US long bonds (+1.3% WoW) and the US 5Y (+0.6% WoW). JGB rates momentum models registered a negative return over the period, ahead of the Bank of Japan (-0.4% WoW). Our other rates models are flagging a rise in the EUR 5s10s30s fly while our discretionary views are mentioned below.

Returns were poor in equities (-0.3% WoW) and FX (-0.1% WoW). In FX, our FX Carry models have had far greater success, up more than 10% YTD, on average. As it stands, they are most bullish on HUF and TRY, followed by a mix of Latam currencies – Bert is reluctantly staying in the Latam FX carry trade, and are most bearish CHF, followed by JPY.

Returns remains marginally positive over the past three months (+1.0%) due to strong equity momentum model returns (+5.2%) while rates (+1.1%) are also a positive.

Our Views

In the US, the Federal Reserve delivered its widely expected 25bp hike. Now markets are pricing a 20% chance of one more hike in November, Dominique’s base case. In Dominique’s FOMC review, she believes that because Chair Jerome Powell sees the current policy stance as already deeply restrictive and believes it has yet to fully filter through the economy, the Fed is more likely to respond to data surprises with fewer 2024 cuts than with additional 2023 hikes.

And, keeping the focus on the US, Mustafa sees the current inversion of the yield is more attributable to an excess demand for duration risk rather than an impending recession. Moreover, sustained inflation will outweigh any potential growth advantages derived from fiscal expenditure related to industrial policy while a US recession is far enough away that continuation of risk-on trade make sense. As a result, he sees value re-entering long 5Y TIPs.

Staying in rates, Henry continues to find the lack of cuts priced in the GBP curve strange, particularly vs EUR. Thus, he sees value in GBP 2s10s steepening outright and versus the EUR curve. In the UK specifically, he sees value in being short the UK 10Y inflation swap. You can find the rest of our 12 current trades here.

*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.)