Month-end Flows: Trick or Treat
With Halloween signalling the end of October, currency traders’ minds might be turning to how month-end flows could potentially affect the forex market today. One trick in looking at this is to look at how major markets have performed in US dollar terms over the last month and then estimating how passive model portfolio managers may have to react. Having established benchmarks to stick to, passive models should be expected to rebalance at month-end if any one particular currency-denominated asset class has outperformed another.
October is a case in point with US equity markets doing well while the European Central Bank’s dovish recalibration of monetary policy and market concern about unfolding events in Catalonia fed into a weaker euro, the slide in which merely underscored the relative underperformance in US dollar terms of euro zone government bonds over the period. Such developments may have skewed benchmarked passive model portfolios towards a higher exposure to US dollar assets than euro assets over the month, which, in such models, might require a remedy at month-end. On that basis, it’s possible, though traders will make their own judgements, that the market could reasonably conclude there might be some demand for EURUSD emerging this Halloween.
Written by Neal Kimberley, External Currency Analyst.