Momentum Returns Remain Muted as Rates Models Continue to Outperform, FX Lags

Summary

• Momentum models were down 0.1% over the past week, with equity models down 0.1% WoW, FX models down 0.4% WoW and rates models up 0.3% WoW.
• Momentum models are down in aggregate over a three-month time frame, with rates models the best performing (+0.6%).

Market Implications

• Momentum models remain bearish the USD – our G10 FX team wrote this week about a potential turn in USD. They think the dollar appears to have started its multi-year downtrend. However, unlike the early 2000s, it may not be a smooth ride but a choppy turn lower.

Latest Signals

Equity momentum model signals have had a couple of small bias shifts. The signal for the S&P 500 (very bullish) is unchanged, but the signals in the Nikkei and the FTSE have flipped to modestly bearish from modestly bullish. Momentum models have become more bullish the Dax (Chart 1).

Rates momentum model signals are all bullish – signals in the US 5Y and JGBs are unchanged (modestly bullish) as are bund and gilt signals (very bullish), while US 10Y and long bond futures are more bullish this week. Ahead of next week’s Fed rate decision, Dominique expects the FOMC to likely heed Waller’s call for policy nimbleness due to multiple uncertainties. She expects a 25bp cut this month and a total of three in 2024.

Turning to FX, momentum models’ biases shifted slightly – USD/JPY, USD/CAD and EUR/SEK signals all remain steady (modestly bearish), and GBP/USD and NZD/USD are also unchanged (very bullish). EUR/USD and AUD/USD shifted from very bullish to modestly bullish, EUR/CHF shifted from modestly bearish to very bearish, while EUR/NOK went from modestly bullish to very bullish.

Model Performance

• Momentum models were down 0.1% over the past week, with equity models down 0.1% WoW, FX models down 0.4% WoW and rates models up 0.3% WoW.

(Charts 1 and 2: blue bar is last week’s signal; orange bar is this week’s signal.)

(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).

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.)