CITI: Month-End FX Hedge Rebalancing: February 2019 Preliminary Estimate: FXWW

From the FXWW Chatroom – The month-end FX hedge rebalancing model points to weak USD selling and buying of all other currencies on Thursday, 28th February. The signal strength is relatively small by historical standards, measuring around -0.42 standard deviations.
· The reason for the weakness of the signal has been the lack of follow through in US equities post a rip roaring equity bounce in January. The MSCI US has gained just over 2% month-to-date. Stocks across the globe rose in February, with the majority of developed markets having outperformed US equities this month.
· For the second consecutive month global bond market moves were muted, with only the Australian bond market seeing notable gains post dovish RBA guidance. Given muted movements in fixed income and relatively little dispersion between equities across developed markets, the rebalancing signal falls below the 0.5 standard deviation threshold. Foreign investors in the US are likely under-hedged on their assets and this leads to a net USD selling need of around 4bps of global passive indexed AUM.
· The strongest signal (+0.59) for an individual currency pair is to buy EURUSD. Significant amounts of event risk occur at month end, with German and EU CPI, Initial Jobless Claims and US GDP figures all being released on February 28th.

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