Reduced USD Bullishness and US Rate Bearishness

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 have struggled over the past week (-1.2% WoW) as markets decoupled from recent trends.
• Over the past three months, they have performed best for rates (+5.5%), marginally positive for FX (+0.9%), while they have underperformed for equities (-3.9%).
• One-month momentum models turned bullish on US rates while USD bullishness has moderated across FX momentum models.

Latest Signals

Momentum models turned bullish on the Nikkei (Chart 1 and Table 1). All other signals are unchanged; one-month lookback models had already been signalling ‘buy’.

One-month momentum models turned bullish on US rates, on a net-basis momentum models remain bearish US rates. Meanwhile, they turned bullish on JGBs as the three-month lookback model flipped to signal ‘buy’.

Within FX, USD bullishness has moderated as momentum models turned bullish on EUR/USD and GBP/USD while bullishness was pared from extremes for USD/JPY (Chart 2 and Table 2).

Model Performance

Momentum models struggled over the past week (equities: -0.2% WoW; FX: -1.3%; rates: -1.9%). The only bright sparks proved DAX (+1.4% WoW) and FTSE (+0.3% WoW).

Over the past three months, momentum models have performed best for rates (+5.5%), and marginally positive for FX (+0.9%). They underperformed for equities (-3.9%).

Our Views

Markets are attached to dovish US data points. Notably, following a CPI miss, a lower-than-expected PPI print pushed expectations for the Federal Reserve (Fed) firmly lower. However, Dominique shows that PPI does not signal a new deflationary trend. Moreover, the Fed is going to have to deal with faster wage growth ahead. We think it means the Fed will have to hike higher than currently priced and that there is risk for further 2s10s inversion – we entered an (equal-duration weighted) 2s10s flattener (target: -100bps). It also means the Fed remains underpriced vs the Bank of Canada.

Markets are mispriced in Europe too. Henry expects another 75bp European Central Bank hike on 15 December – there is value in paying short-end EUR swaps – while he believes the Bank of England (BoE) will not be able to hike as the market expects – there is value in positioning for a lower BoE terminal rate, alongside gilts curve steepening. This is supported by his previous analysis of rate rises on UK mortgages, and UK business.

Turning to FX, we have adjusted our positions across DM and EM. In DM, we remain short GBP/CHF while EUR/NOK has sprung toward year highs. And, in EM, we turned short USD/CLP, adding to long SGD/CNH and long THB/TWD.

*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.)