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Academic audit

FailedFX momentum

Currency Momentum Factor

The three-gate gauntlet · genuine only if it clears all three and survives adversarial refutation
Gate 1
Survivorship-free
immune
clean panel
Eliminated here
Gate 2
Placebo ≥ P95
P40.5
outranked ~81 of 200 baskets
Gate 3
Cost-aware net
RF -0.62
net-negative after costs
Failed
Worst 12-month leg (RF)-0.88
−1.00 floor0
Every strategy here — winners included — loses in its worst 12 months. Depth is honest context, not the verdict.
Rejected at the luck gate — its net ranked no better than random baskets (below the P95 skill line).

Currency momentum ranks currencies by their recent excess return and goes long the recent winners while shorting the recent losers, rebalancing cross-sectionally. It is the FX analogue of equity momentum.

What we found

In our G10 spot data this leg was net-negative, not a robust effect. It landed at the 40.5th placebo percentile — indistinguishable from random currency baskets — with a negative risk-adjusted RF, so there is no reliable cross-sectional currency-momentum edge to build on here. Unlike the related FX carry leg, momentum did not survive the test. The construction is survivorship-immune (currencies are not delisted like stocks), so the failure is not a data-selection artefact; it simply did not generalize to our sample.

How we tested it
2005–2026 test windowmodelled liquidity-aware costssurvivorship immune
  • G10/EM currency spot data. Realistic modelled costs.
  • Placebo / robustness test: real result vs random baskets or shuffled signals (real vs the 95th percentile of random)
Source: Menkhoff, Sarno, Schmeling & Schrimpf (2012), "Currency momentum strategies", J. Financial Economics
Read the paper ↗
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Research, not investment advice. “Validated” factor-legs are market-neutral diversifying building blocks with a losing worst year — none is a standalone tradeable strategy. Metrics are cost-aware and modelled (not live fills); the 2005–2026 test window is out-of-sample versus the source paper. Dollar figures are not returns and are omitted by design.