Often you may hear about ‘month end’ flows having a positive or negative effect on a currency during the last few days of the month. Thus, I’ve decided to take a look at asset market capitalizations in the major market economies to help us try to determine which direction these ‘flows’ may move. Typically, the largest impact is seen into the 11am ET fix as hedge fund and mutual fund portfolio managers scramble to rebalance their remaining currency exposure in order hedge their overall portfolio.
Market capitalizations for the month of February have been positive across the board, however the largest gain is seen in the United States which sees a rise of over 600B on the month (as of 2/23 close). So how do we make sense of this? Typically, the more severe a change of the principal assets (primarily equities and bonds), then the more likely portfolio managers are either under or over-exposed to certain currencies. Our model suggests they may be under hedged, consequently they may need to further diversify away from USD’s. Therefore, I believe the buck may continue to suffer as we head into Wednesday’s fixing.
In the chart below I have outlined the expected directional movement broken down pair by pair based upon our proprietary month-end model. Customarily, a reading of +/- 400B on the month produces a stronger bullish or bearish signal. With that said, all of the pairs besides EUR/USD see signals which satisfy the aforementioned+/- 400B reading: USD/CAD, USD/CHF, USD/JPY (bearish) and AUD/USD, GBP/USD (bullish), while EUR/USD sees a slightly more moderate bullish signal.
Source: Bloomberg, FOREX.com
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