Economic momentum and currency returns

Abstract

Past trends in a broad range of fundamental variables predict currency returns. We document that a trading strategy that goes long currencies in countries with strong economic momentum and short currencies in countries with weak economic momentum exhibits an annualized Sharpe ratio of about one and yields a significant alpha when controlling for standard carry, momentum, and value strategies. The economic momentum strategy subsumes the alpha of carry trades, suggesting that crosscountry di↵erences in carry are captured by di↵erences in past economic trends. Moreover, we study investors' expectations of fundamental variables and find the expectations to be extrapolative but negatively related to the portfolio weights, which rank economic trends across countries.

Business cycles and currency returns

“…In related work, Dahlquist and Hasseltoft (2019) propose a currency strategy based on economic momentum, defined on the basis of eight economic variables that capture interest rate, price, industrial production, and unemployment information. This broad information set is combined to generate signals of countries which are growing more strongly (long position) and countries which are growing the least (short position), based on past trends that range from one to 60 months.…”

Uncertainty Network Risk and Currency Returns

“…We form an tradable strategy linked to the past performance of currencies as initially proposed by Menkhoff, Sarno, Schmeling, and Schrimpf (2012b). Recently, Dahlquist and Hasseltoft (2020) further connect currency returns to past trends in fundamentals including economic activity and inflation. At the end of each month t, we compute the average of currency excess returns over the last six months.…”

“…We demonstrate that network returns stemming from causal nature of shock propagation are virtually unrelated to the existing strategies. 6 The literature documents the strategies, among many others, based on the carry trade (Lustig and Verdelhan, 2007;Lustig, Roussanov, and Verdelhan, 2011;Menkhoff, Sarno, Schmeling, and Schrimpf, 2012a), momenum (Menkhoff, Sarno, Schmeling, and Schrimpf, 2012b;Asness, Moskowitz, and Pedersen, 2013;Dahlquist and Hasseltoft, 2020), business cycles (Colacito, Riddiough, and Sarno, 2020), and global imbalances (Corte, Riddiough, and Sarno, 2016).…”

Ukrainian hryvnia under the floating exchange rate regime: diagnostics of the USD/UAH exchange rate dynamics

“…Currency anomalies and different financial systems of countries have become the basis for the formation of various trading strategies using which foreign exchange market participants can make abnormal returns: carry trade, output gap, momentum investment (Dahlquist & Hasseltoft, 2015), value investment (Asness, Moskowitz, & Pedersen, 2013), based on information in the volatility risk premium (Corte, Ramadorai, & Sarno, 2014), optimal dynamic currency strategies (Maurer, To, & Tran, 2019), etc.…”