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    March Month-End Model Points to Possible USD Buying


    Traders often refer the impact of ‘month end flows’ on different currency pairs during the last few days of the month. In essence, these money ‘flows’ are caused by global fund managers and investors rebalancing their currency exposure based on market movements over the last month. For example, if the value of one country’s equity and bond markets increases, these fund managers typically look to sell or hedge their now-elevated exposure to that country’s currency and rebalance their risk back to an underperforming country’s currency. More severe monthly changes in a country’s asset valuations lead to larger portfolio adjustments between different currencies.

    In order to predict these flows and how they impact FX traders, we’ve developed a model that compares monthly changes in the total value of asset markets in various countries. In our model, a relative shift of $400B between countries over the course of a month is seen as the threshold for a meaningful move, whereas monthly changes of less than $400B are often overwhelmed by other fundamental or technical factors. As a final note, the largest impact from month-end flows is typically seen heading into the 11am ET fix (often in the hour from 10 & 11am ET) as portfolio managers scramble to hedge their overall portfolio ahead of the European market close.

    As hard as it is to believe, the first quarter of 2015 is already coming to an end. Volatility was relatively subdued throughout March, and market performance was certainly more nuanced than we saw in February. As of writing, US equities are trading slightly lower on the month, while European equities (beyond the UK’s FTSE index) are trading generally higher, boosted by the beginning of the ECB’s Quantitative Easing program. Meanwhile, bond yields feel across the board, with the yield on 10yr German bunds falling to a record low of 0.14% earlier midway through the month.

    Overall, US markets lagged their European counterparts, meaning that global portfolio managers will have to sell European investments and buy US assets to rebalance back to their target allocations. This means that we could see some demand for the US dollar ahead of the European close tomorrow. As the chart below shows, these signals generally don’t quite reach the /- $400B threshold for a significant move, but in otherwise slow, pre-holiday trade, the month-end flows could still have a notable impact on markets. Perhaps these flows, if they emerge, could reinvigorate the dollar uptrend ahead of Friday’s Non-Farm Payrolls report.



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