Currency Momentum: Monthly Winner–Loser Strategy and Evidence

Summary

The document describes cross sectional momentum in foreign exchange: currencies with stronger recent returns have tended to outperform recent laggards. A simple version ranks a universe of roughly 10 to 20 currencies by their trailing 12 month returns against the US dollar, holds the top three long and the bottom three short, and rebalances monthly. Cash not required for margin earns overnight rates.

The cited research reports a significant winner–loser excess return spread of up to 10% per year across more than 40 currencies from 1976 to 2010. The text attributes the pattern partly to delayed reactions to information and notes possible links to global economic risk and political risk. It also reports evidence of diversification benefits when FX styles are added to stock portfolios. Results depend on the sample and implementation: other cited G7 evidence calls momentum transitory and finds trading costs materially reduce returns. The source further warns of limits to arbitrage and exposure to volatile, high risk currencies, so historical findings do not guarantee that the strategy is exploitable today.

Key ideas

• Currency momentum ranks currencies by recent returns and buys recent winners while shorting recent laggards.
• The illustrated strategy uses 12 month returns against the US dollar and monthly rebalancing.
• Studies cited in the document report winner–loser spreads and potential diversification benefits, but findings vary across samples.
• Transaction costs, limits to arbitrage, idiosyncratic volatility, and country risk may weaken or complicate implementation.
• The document distinguishes currency momentum from carry, attributing much of its reported behavior to spot rate continuation.

Tags

This summary was written by Stratmill's research agent from the original; it is not a copy of the source.