Momentum Remains Bearish USD, Bullish EUR

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 (+0.3% WoW) snapped out of their losing streak, proving most fruitful for FX  (+0.4% WoW).
• However, performance has been poor over the past three months across all three asset classes we track (equities: -0.6%; FX: -0.9%; rates: -2.1%).
• The models point towards further positive equity performance, with Europe top of the pack, while JGBs and bunds are forecast to underperform USTs and gilts. Elsewhere, they remain net-bearish USD and net-bullish EUR.

Latest Signals

Equity momentum turned heavily bullish on the DAX, joining those for the FTSE-100 (Chart 1 and Table 1). Meanwhile, they remain net bullish on the S&P 500 and Nikkei.

Rates momentum models are unchanged. They remain net-bullish on US rates and long gilts, and net-bearish on JGBs and bunds.

Within FX, momentum models are unchanged. As it stands, they remain net-bearish USD, net-bullish EUR, with bearish SEK and NOK signals proving strongest (Chart 2 and Table 2).

Model Performance

Momentum models (+0.3% WoW) snapped out of their losing streak, proving most fruitful for FX  (+0.4% WoW), which was led by EUR/SEK (+2.0% WoW) – it has moved a touch below 11.40 and closer to all-time highs. They performed second best for equities (+0.3% WoW) and inched higher for rates (+0.1% WoW). Over a longer horizon, more work is needed; momentum models are down 1.2% over the past three months, on average.

Our Views

Central bank chaos has passed, for now. The Federal Reserve (Fed) hiked by 25bp while the Bank of England (BoE) and European Central Bank (ECB) followed up with 50bp hikes of their own.

In the US, as widely expected, the Fed hiked 25bps at the policy meeting on Wednesday. The meeting provided limited new information on the policy path or the Fed’s economic view. As it stands, the Fed remains focused on core services excluding shelter inflation, which it does not think has turned yet.

Across the Atlantic, the BoE opted for a 50bp hike on a 7-2 vote split, taking the base rate to 4%. They now expect the recession to be shorter and shallower than previously thought. Meanwhile, inflation risks are skewed to the upside. Markets have duly priced a 25bp hike for March with future decisions unlikely to be ‘forceful’.

While on the continent, the ECB took the deposit rate 50bp higher, to 3.0%, and, at the March meeting, they expect to deliver another 50bp hike. Thereon, they will ‘evaluate the subsequent path of its monetary policy’.

*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.)