From the FXWW Chatroom – CITI: The month-end FX hedge rebalancing model suggests moderate selling of USD on Wednesday, 31st July. The signal measures on average +0.5 historical standard deviations.
US equities continued on their upward trajectory in July, fuelled by dovishness across a swathe of central banks and benign inflation expectations. The majority of developed market stock indices rose in July. Only Sweden’s equity market underperformed this month with a lacklustre return of -0.27%. In addition to positive global equity performance, the majority of local currency bond indices across developed markets performed well this month.
Our estimated signal to sell USD is predominately driven by equity investor rebalancing needs. This is due to positive US equity market performance leaving foreign investors under hedged on their equity assets. The signal to sell USD vs CHF, NOK and SEK is strongest at -0.6 standard deviations.
The EURUSD buy signal is weakest (+0.25). The positive performance of Euro Area assets means that foreigners’ hedging of Euro Area assets partially offsets the hedging needs of Euro Area based investors. Overall, the signal suggests moderate USD selling into the month end fix, headline risk comes from US economic releases.
CITI: The overall asset rebalancing signal suggests a weak rotation from equities to bonds at month end with a signal of just +/-0.3 historic std. dev.
The rotation is likely to be most pronounced in the US with equities receiving the mildly significant outflow signal at -0.6 hist. std. dev., while UK and Canadian equities are set to see inflows. All three EM regions are poised to see outflows from both equities and bonds with CEE bonds nothing a strong signal.
The month-end FX impact is likely to be USD selling against GBP and JPY.