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Simple Currency ETF Momentum Strategy

Steve LeCompte | | Posted in: Currency Trading, Momentum Investing

Guide Trend Following and Momentum Asset class and ETF momentum

Key Insight

Monthly relative momentum among four currency ETFs (UUP, FXE, FXY, CYB) is associated with higher average returns at short lookbacks, but results are unappealing and subject to snooping; gross, frictionless, Mar 2007–Aug 2022; Top 1/2/3 portfolios, monthly reformation.

Do exchange-traded funds (ETF) that track major currencies support a relative momentum strategy? To investigate, we consider the following four ETFs:

Invesco DB US Dollar Bullish (UUP)
Invesco CurrencyShares Euro Currency (FXE)
Invesco CurrencyShares Japanese Yen (FXY)
WisdomTree Chinese Yuan Strategy (CYB)

We each month rank these ETFs based on past return over lookback intervals ranging from one to 12 months. We consider portfolios of past winners reformed monthly based on Top 1 and on equal-weighted (EW) Top 2 and Top 3 ETFs. The benchmark portfolio is the equally weighted combination of all four ETFs. We present findings in formats similar to those used for the Simple Asset Class ETF Momentum Strategy and the Simple Asset Class ETF Value Strategy. Using monthly adjusted closing prices for the currency ETFs during March 2007 (when three become available) through August 2022, we find that:

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Trend Following and Momentum guide

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Further Reading

Calendar Effects, Currency Trading Turn-of-the-Month Effect for Currencies? Turn-of-the-month (eight trading days centered on month-end) average abnormal returns for UUP, FXE and FXY versus all eight-day... Currency Trading, Economic Indicators Asset Class ETF Interactions with the U.S. Dollar Most asset class ETFs (except TLT) show moderately negative same-month correlations with UUP returns, while lead-lag correlations are... Currency Trading, Economic Indicators Asset Class ETF Interactions with the Yen Yen strength correlates negatively with U.S. equities but positively with TLT and GLD contemporaneously, with weak predictive power... Currency Trading, Economic Indicators Asset Class ETF Interactions with the Euro FXE monthly returns correlate positively with same-month returns of most SACEMS/SACEVS asset class ETFs, except TLT, but not... Calendar Effects Does the Turn-of-the-Month Effect Work for Asset Classes? Average abnormal turn-of-the-month returns across 10 asset class ETFs (vs all eight-trading-day intervals) were 0.4% in first sample... Strategic Allocation, Volatility Effects SACEMS with Inverse VIX-based Lookback Intervals Update Inverse-VIX variable lookback (1-12 months) for SACEMS (monthly momentum rotation across asset-class ETFs) gives mixed results for Top...