Citi : Month-End FX Hedge Rebalancing: December 2016 Preliminary Estimate

From the FXWW Chatroom: The preliminary hedge rebalancing estimate points to both USD and EUR selling and buying of all other currencies on Friday, 30 December. The signals to both sell EURUSD combined with selling USD vs. the other G10 is relatively rare historically.

·       The sell EUR signal is the result of the extremely good performance of the Euro Area equity markets, as foreign investors’ likely need to hedge the increased value of their EA asset holdings.  Equities have had a strong December across G10 but the Euro Area markets have done exceptionally well gaining 6.7% so far.

·       US asset performance is mixed versus the other economies.  However, sell USD signals vs. G10 (except EUR) are produced given our assumptions on hedge ratios and asset allocation which imply that foreign investors’ USD selling needs will on margin exceed USD buying by US investors with foreign assets.

·       Nevertheless, note that all of the month-end signals are relatively weak, with none exceeding 0.5 standard deviations.

·       There are no major data releases or central bank events scheduled ahead of the month-end fix this month. December Chicago PMI release will fall closest to 16:00 London time.

Citi… Month-End Asset Rebalancing: December 2016 Estimate

·       The Asset Rebalancing Model points to a rotation from equities to bonds this month with a relatively strong signal of 0.7 standard deviations.

·       This month’s signal is mostly driven by the outperformance of US, European and Japanese equities relative to their bond markets. Poor performance in Asia equities and expected inflows is a notable exception given the general upside for stocks in December.

·       The asset rebalancing flow is expected to be stronger this month compared to the hedge rebalancing and points at USD buying and EUR selling.

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