As if there wasn’t enough on the agenda for traders this week, let’s not forget that there is also month-end shenanigans to deal with potentially.
Let’s dive straight into it and see what the banks are saying about October’s month-end flows and how they might impact major currencies.
To start, Barclays is flagging a weak dollar buying signal against most major currencies, though with no clear directional bias against the euro or yen. In other words, there is a slight positive tilt in favour of the dollar but hardly anything to get too excited about.
Meanwhile, Deutsche sees a more mixed picture for the dollar this time around as their month-end rebalancing model is hinting that cross-currency flows might potentially play a bigger role this time around.
Of note, they are highlighting strong CHF/JPY selling pressure, backed by a sizeable 13% month-to-date performance differential between Swiss and Japanese equities. And they also flag EUR/GBP buying interest, on the back of a roughly 6% differential in European and UK equities as concerns surrounding France encouraged rotation into UK banks and defence stocks.
(Note: The month-to-date differentials are based on Deutsche’s time of writing of the month-end report.)
As a reminder, these flows typically arise as fund managers adjust their portfolios following relative moves in stocks and bonds during the month. So, that can create brief buying or selling pressure in major currencies, particularly around the 4pm London fix.
Looking at the signals as a whole this month, there’s not much to suggest anything notable for the dollar. So, that will likely make for less interesting moves considering how traders and broader markets are still very much fixated on digesting the Fed decision as well as how Treasury yields and US tech stocks will react to the events yesterday.
In any case, do also be reminded that these flows should not be treated as a hard directional call. They are notoriously difficult to pin down and tend to take on more importance as we get closer to the fix itself. If anything else, think of them as another piece of the puzzle rather than the main driver of price action.
This article was written by Justin Low at investinglive.com.