From the FXWW Chatroom: The final month-end FX hedge rebalancing estimate continues to point to USD selling and buying of all other currencies today, 31 May.
· Although US equities have given up some of their month-to-date gains since we published the preliminary estimate on 25 May, most other major equity markets have dropped by even more since then. Together with gains in US fixed income, this has led to greater US out-performance and strengthened the signal to sell USD.
· We estimate today’s USD selling need to be about 10.4 basis points of passive index-following AUM, 8.4bp of which comes from international equity and 2bp from fixed income investors. Foreign selling of USD to hedge gains in US assets explains around 90% of the signal. However, due to losses in Euro Area equities and fixed income, we estimate that US investors will also on the margin have to sell USD today to reduce their foreign hedges.
· The average USD sell-signal is slightly stronger than average, measuring at -1.2 standard deviations. Poor performance of Euro Area assets makes the buy EURUSD signal strongest at +1.7 standard deviations.
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