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. This same concept applies for ‘quarter-end’ as well.

Market capitalizations for March were mixed across the board – The largest gain was seen in the United States which saw a rise of 385B on the month, while the largest decline was in the EU (collectively), falling 59B (as of 3/25 close). Meanwhile, capitalizations for Q1 were nearly all positive across the board, with the exception of Canada, which fell 48B from January through March. 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 models suggest that on both a monthly and quarterly basis they may be holding ample USD exposure, consequently they may need to meaningfully diversify away from the dollar over the coming days.

In the charts below we have outlined the expected directional movement broken down pair by pair based upon our proprietary month & quarter-end models. Customarily, a reading of +/- 400B on the month (Exhibit 1) and +/- 900B on the quarter (Exhibit 2) produces a stronger bullish or bearish signal. With that said, only one currency pair satisfies the +/- 400B level on a monthly basis: EUR/USD (bullish), however AUD/USD, GBPUSD (bullish) and USD/CAD, USD/CHF (bearish) are near nearing the aforementioned monthly threshold as well. Meanwhile, allof the major currency pairs see a reading which exceeds +/- 900Bon the quarter:  GBP/USD, AUD/USD, EUR/USD(bullish) and USD/CAD, USD/CHF, USD/JPY (bearish) – Thus, we believe the buck could see a substantial impact from these flows heading into Friday’s fixing.

Furthermore, we should also be mindful of the calendar as this also sees Japan’s fiscal year end (March 30th) as well as the Easter holiday this upcoming Sunday – Thus, most global markets will be closed on Friday and many traders may even look to take Thursday off as well. As a result, we could be faced with rather thin and illiquid trading towards the end of the week.

*Should any of the global equity markets see a rather large gain or loss over the coming days, 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.

Exhibit 1:

Source: Bloomberg, FOREX.com

Exhibit 2:

Source: Bloomberg, FOREX.com