State-dependent cross-momentum in currency markets

This study examines whether equity market information predicts a cross-section of currency returns. We find a cross-momentum effect in which currencies associated with high past equity returns outperform those associated with low past equity returns. Although the baseline effect is modest, it is highly state-dependent. Specifically, the effect becomes economically and statistically significant when the cross-sectional dispersion in currency returns is high and the U.S. dollar is strong. This pattern is predicted using lagged information and holds out of sample. Further, we show that the predictive power originates from the idiosyncratic rather than the global component of equity returns, highlighting country-specific equity information as the primary driver of cross-momentum.