Equity rebalancing flows are expected to support the USD into month end. The month of June thus far saw US equity markets underperform G10 peers . USD should therefore benefit from rebalancing towards US assets at month end.
This effect is likely to be most pronounced vs EUR, JPY and CHF. Our model shows the strongest USD buying signals vs EUR, JPY and CHF. This reflects the relative strength of local equity markets vs the S&P 500, with Eurostoxx 50, the Nikkei and the Swiss Market Index the strongest G10 performers in June to date. Signals in other currencies are weak and inconclusive.
The timing of month end rebalancing flows varies across currencies. In the updated version of our model , we produce signals for each of the 5 trading days leading up to month end. The “hit ratio” of these signals (i.e. the % of times it matched the direction of realized FX price action) allows us to make inferences on the timing of these rebalancing flows – and of the likely FX reaction. For JPY and CHF, two currencies displaying stronger signals this month, this suggests the impact should be more forceful respectively one and two days before month end.
The explanatory power of relative equity returns for month end FX trading is falling. Last month we highlighted how the statistical significance of the estimated betas of month end FX price action to relative MTD equity returns had declined relative to the previous month. This trend appeared to continue in June, with our estimated betas displaying low levels of statistical significance across all G10 currencies. Given the large performance gap between US and ex-US equity markets, we still think the signals these generate offer value, but the decline in explanatory power also suggests some caution is warranted.