April month-end rebalancing may have little impact with heavy US calendar next week

Backdrop:

Often you may hear about ‘month end’ flows having a positive or negative effect on a currency during the last day(s) of the month. Thus, we’ve decided to take a look at asset market capitalizations in the major market economies to help us try to determine which direction these ‘flows’ may move. Typically, the largest impacts are seen into the 11am ET fixes (of the last few days of the month) as hedge and/or mutual fund portfolio managers scramble to rebalance their remaining currency exposure in order hedge their overall portfolio.

Market capitalizations for April were mixed across the board – The largest gain was seen in the United States which saw a rise of 150B on the month, while the biggest decline was in Japan, falling 39B (as of 4/24 close). So how do we make sense of this? Well, the more severe a change of the principal assets (primarily equities and bonds), then the more likely portfolio managers are either under or over-exposed to certain currencies. Our model suggests their exposure is essentially right where it should be, consequently they may not need to meaningfully adjust their USD positioning.

In the chart below we have outlined the expected directional movement broken down pair by pair based upon our proprietary month-end model. Customarily, a reading of +/- 400B on the month produces a stronger bullish or bearish signal. With that said, none of the currency pairs satisfy the aforementioned +/- 400B on the month – Thus, we believe the buck is unlikely to see a substantial impact from these flows heading into next Wednesday’s fixing.

However, we should also be mindful of the plethora of key US economic data/events which could significantly impact the USD next week:

• Monday – Mar. Pending Home Sales, Apr. Dallas Fed Manufacturing
• Tuesday – Apr. Consumer Confidence
• Wednesday – Apr. ADP report, 1Q Advance GDP, Apr. Chicago PMI, FOMC rate decision
• Thursday – Weekly Jobless claims, Mar. Personal Income & Spending, Apr. ISM Manufacturing
• Friday – Apr. Employment report, Mar. Factory Orders

Source: Bloomberg, FOREX.com