FX Month End Rebalancing Overview

From the FXWW Chatroom: The preliminary update of the month-end FX hedge rebalancing model predicts USD buying this month-end.

The signal is driven by the sharp month-to-date drop in global equity indices, which means that equity investors across the globe will need to reduce their outstanding hedges.

Given that US equities are a dominant component of global indices and investors outside the US traditionally employ higher hedge ratios, foreign investors’ USD buying needs likely dominate selling of USD by US domestic investors.

The average strength of the USD buy-signal excluding JPY is around +1.2 standard deviations, strongest since August 2015 when equities also suffered. The signal to sell JPY vs USD is significantly weaker due to the out-sized drop in Japanese equities, which means that foreign investors will also need to buy back JPY to reduce their hedges.

The most significant event risk ahead of the 4pm London time fix on Friday will probably come from the advance release of US Q4 GDP. Citi

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