Economic data releases may take centre stage but if there’s one other thing to be wary about today, it is month-end rebalancing. And with September also marking the end of the third quarter, there could be an extra layer of flow-driven volatility before trading wraps up for the month.
UBS’ month-end rebalancing model is flagging USD/JPY as the standout sell signal this time around. The firm also argues that while the S&P 500 has outperformed its G10 equity peers this month, that hasn’t translated into equally clear signals across the rest of the FX space. So besides the call on USD/JPY, UBS sees most other G10 pairs showing either weak or poorly aligned signals relative to equity performance.
Having said that, UBS did issue a caveat with their note in saying that the model’s predictive power has been relatively weak recently. As such, I wouldn’t treat this as a straightforward directional trade. I’d take it more as a heads-up on where rebalancing flows could potentially exaggerate price action later today.
UBS’ call becomes even more interesting when compared to BofA’s month-end flow signals, which point to yen and pound selling alongside euro buying. The two models seem to be contradicting one another, so that isn’t giving traders a particularly clean message on the yen.
And I would argue that is probably the main takeaway here. As mentioned before, month-end models aren’t forecasts in themselves. However, they can at least help explain unusual moves when liquidity thins and larger portfolio flows hit the market.
With month-end and quarter-end coinciding today, I’d be a little more cautious about reading too much into sudden FX moves around the fixing window. Some of the unusual price action may simply be flows doing the talking.
This article was written by Justin Low at investinglive.com.