Citi…The final estimate of month-end FX hedge rebalancing

From the FXWW Chatroom: Citi… The final estimate of month-end FX hedge rebalancing needs points to mild USD and JPY buying and selling of all other currencies today.

This month’s USD buy-signal is driven by the 0.57% decline in US Treasuries. This has left foreign investors over-hedged relative to reduced underlying asset values. The MSCI US equity index is up just 0.12% month-to-date.

US fixed income volatility dominating equity moves is unusual. Month-to-date moves in the Citi US Government Bond Index have exceeded MSCI US only 13% of the time in absolute terms in the past 20 years.

The Citi GBI for Japan has suffered the biggest month-to-date losses and Japanese equities have also under-performed most other markets. The model therefore suggests that foreigners’ needs to buy JPY in order to reduce hedges on Japanese assets will on balance dominate the needs of Japanese investors to trim hedges on their foreign assets.

This month’s signals are weak by historical standards, falling short of 0.5 standard deviations in all crosses.

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