April Month-End Rebalancing

Often you may hear about 'month end' flows having a positive or negative effect on a currency during the last day 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 April was mixed - With a slight gain seen in the United Kingdom (rose 20B) and the largest loss witnessed in the Eurozone, which fell 316B (as of 4/26 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 are rather evenly balanced, thus there should not be much of a need to move into or out of any one particular currency. Hence, I do not foresee a material impact from month-end flows for the month of April for the majors (there could be an interesting play in one of the crosses…continue reading).

In the chart below I have outlined the expected directional movement broken down pair by pair based upon our proprietary month/quarter-end models. Customarily, a reading of +/- 400K on the month produces a stronger bullish or bearish signal. With that said, none of the currency pairs below see a signal which satisfies the aforementioned +/- 400K reading. However, with the slight bullish signal produced for EUR/USD and minor bearish signal for GBP/USD, this could lead to a pragmatic move in the EUR/GBP cross (bullish) heading into Monday's fixing.