November Month-End Rebalancing may see USD come under pressure

Backdrop:

• Often you may hear about ‘month end’ flows having a positive or negative effect on a currency during the last few 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 impact is seen heading into the 11am ET fix (often in the hour from 10 & 11am ET) as hedge and/or mutual fund portfolio managers scramble to rebalance their remaining currency exposure in order hedge their overall portfolio.

Market capitalizations for November were mixed across the board – The largest gain was seen in the United States which saw a rise of 549B on the month, while the biggest decline was in Australia, falling 111B (as of 11/24 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 they may be holding significant USD exposure, consequently they may need to meaningfully diversify away from the dollar over the coming days.

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, all of the major currency pairs see a reading which exceeds the +/- 400B level on the month: AUDUSD, EURUSD, GBPUSD (bullish) and USDCHF, USDCAD, USDJPY (bearish). Accordingly, we believe the buck could see a substantial impact from these flows heading into Friday’s fixing.

Please keep in mind that with the US Thanksgiving holiday on Thursday and the retail frenzy known as “Black Friday” on Friday it may cause traders to try and square up their positioning earlier than usual. As a result, the anticipated month-end flows could be stronger this upcoming Wednesday rather than on the last trading day of the month.

*Should any of the global equity markets see a rather large gain or loss over the coming days, and accordingly a change in market capitalization which would meaningfully change the signal, then we’ll post an updated chart of the Rebalancing Model on Twitter.

Source: Bloomberg, FOREX.com