CITI: Final…Month-End FX Hedge Rebalancing: August 2018 Final Estimate: FXWW

From the FXWW Chatroom – The final estimate of month-end FX hedge rebalancing flows calls for USD selling and buying of all other currencies today.
· Relative to the preliminary estimate published last week, the final USD sell-signal has strengthened and evened out across currency pairs. The signal now exceeds one historical standard deviation in all crosses. This is the first time this has happened since the March 2016 month-end.
· Strong month-to-date performance of US equities and bonds contrasts with losses in major European markets and Japan, leading to greater than average rebalancing needs. Foreign investors in US assets need to sell USD to hedge increased asset values while investors in European and Japanese assets need to buy EUR, GBP and JPY to reduce over-hedges.
· The dominant position of the US in international asset benchmarks as well as higher FX hedge ratio assumptions for smaller base currencies lead to USD selling estimates even for NOK, SEK, AUD and NZD where local assets have done well.
· At +1.5 standard deviations, the signal to buy JPY is still strongest. Due to our assumption of lower FX hedge ratios used by JPY-based investors, this is mainly driven by foreigners’ needs to reduce hedges on Japanese assets.

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