From the FXWW Chatroom – The month-end FX hedge rebalancing model sends a strong signal to buy USD and sell all other currencies at the October month-end WMR fix. The average signal strength measures around 2 historical standard deviations, making it the strongest USD buy-signal since the Global Financial Crisis of 2008.
· After staging a relatively stable recovery from the early February dip, global equity prices have once again fallen sharply in October. The -9% month-to-date move in the MSCI US equity index appears particularly significant in historical context, measuring at 2 standard deviations of equivalent MTD moves since the start of 1996. The FTSE US Government Bond Index has also fallen by -0.3% this month, contrasting with gains in most other developed markets.
· The under-performance of US assets, together with our assumed dominant position of the US in international asset indices and tendency for foreign investors to hedge more, gives a strong signal to buy USD. We estimate the net USD buying need at around 18bp of global passive AUM, making it the fourth largest preliminary signal since 1996. The signals are fairly uniform across currencies, except that the signal to sell JPY is somewhat weakened by the dominance of non-Japanese investors’ needs to lower Japanese equity hedges.
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