May month-end signal largest since October 2011

Just wanted to quickly update our month-end model as it indicates the largest signal since October 2011 – Strong USD outflows are anticipated based on this analysis, with the largest directional moves likely in USDJPY and AUDUSD.

Keep in mind that a good portion of this selling could have already be satisfied earlier in the week, especially when we look at USDJPY which has already declined ~200 pips over the past 2 days, and that the bulk of the action occurs in the hour(s) leading up to 11am ET.

Backdrop:

Often you may hear about ‘month end’ flows having a positive or negative effect on a currency during the last day(s) of the month. Thus, we’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 impacts are seen into the 11am ET fixes (of the last few days of the month) as hedge and/or mutual fund portfolio managers scramble to rebalance their remaining currency exposure in order hedge their overall portfolio.

Market capitalizations for May were mixed across the board – The largest gain was seen in US which saw a rise of 697B on the month, while the largest decline was in Japan, falling 206B (as of 5/27 close). So how do we make sense of this? Well, 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 holding significant USD exposure, consequently they may need to meaningfully diversify away from the dollar over the coming days.

In the chart below we 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, each of the major currency pairs see a signal which satisfies the aforementioned +/- 400B on the month: AUDUSD, GBPUSD, EURUSD (bullish) and USDJPY, USDCAD, USDCHF (bearish) – Thus, we believe the buck could see a substantial impact from these flows heading into Friday’s fixing.

That said, if any of the global equity markets see a rather large gain or loss on the day, and accordingly a change in market capitalization which would meaningfully change the signal, then we’ll post an updated chart of the Rebalancing Model on Twitter.

Source: Forex.com

30.05.2013