Currency momentum

Checked October 2026

Currency momentum buys the currencies that rose the most against the dollar over the past month and sells the ones that fell the most. Menkhoff, Sarno, Schmeling and Schrimpf published it in the Journal of Financial Economics in 2012. Backtoast ran it. The one-month version failed our test, losing 7.5% a year over 167 trades.

Backtoast

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Currency momentum

This version ranks currencies against each other, so something is always bought and something sold. Each month the rule buys the three that rose most against the dollar over the past month and sells the three that fell most, then re-ranks.

Eleven of the 15 pairs quote the dollar first, and the run ranked each pair by its own quoted move, so it could end up net long or short the dollar, where the paper holds three currencies long and three short.

Currency time series momentum looks at each currency on its own over 12 months instead of ranking them.

When it works

Currency momentum earns when the same currencies keep leading from one month to the next and loses when the leaders reverse, and Menkhoff and his co-authors found the profit after costs came from minor and emerging currencies. Traders keep it next to carry because the paper found the two behave very differently. Ranking on 3 to 12 months instead of one, which the paper also tested, is the usual variant, and a draft can test that before you spend a full test.

Origins

Menkhoff, Sarno, Schmeling and Schrimpf reported 9.46% a year before costs for the one-month version from 1976 to 2010, and 7.91% sorted on spot moves alone. With only developed currencies, they found the returns were basically gone after costs. The run used 15 currencies, the peso, rand and yuan included, from late 2021 to October 2026.

The run is Backtoast's, from 29 October 2026, after costs.