What will be impact of currency rebalancing on trading for end of month and end of quarter?
With US equities having a difficult start to the year, it pays to take a look the impact of month end currency rebalancing. While not an exact science you will get an idea of the potential impact on currency flows from weaker U.S. stocks.
The reason that currency rebalancing for month end is impacted by moves in the stock market is because institutional investors, such as pension funds and fund managers, adjust their currency hedges based on changes in the value of their portfolios.
Let’s take a look at the performance of U.S. stocks and currency hedging.
U.S. equity performance for March and the firsat quarter.
| 12/31/24 | 2/28/24 | 3/26/24 | % chg m/m | % chg y-t-d | |
| S&P500 | 5881 | 5954 | 5712 | -4.1% | -2.95 |
| Nasdaq | 19311 | 18847 | 17899 | -5.0% | -7.3% |
| DJIA | 42544 | 43841 | 42455 | -3,2% | 0.0% |
Global investors in foreign equities manage the exchange risk by hedging their currency exposure. If the value of foreign equity holdings (e.g. U.S stocks) increases, hedges need to be adjusted by selling dollars to maintain the desired hedge ratio. On the other hand, if stocks fall during the month, the amount hedged needs to be reduced by buying dollars to reflect the lower value of the portfolio
So, looking just at the weak U.S. equity performance suggests dollar buying for month end to reblaance currency hedges.
I have not addressed the impact of the performance of U.S. equities vs foreign stocks, such as the DAX, which has had a strong run up this year while U.S. equities traded weaker. As of this writing, the DAX is up x% vs. the close in February and x% for the y-t-d.
Timing
Currency rebalancing flows generally occur in the last few days of the month. In this regard, the key day/time is the 4PM London fixing on the last day of the month. What complicates the outlook is that there are some institutional investors which take a mire passive approach and adjust currency hedges at quarter rather than month end.
While not an exact science, there will be some traders looking to anticipate month end rebalancing flows ahead of the market. i
In addition, If global equities rise/fall in value relative to fixed income, asset mangaers may have to adjust respective holdings to restore the asset allocations between the two.
In any case, month end can be complicated by quarter end flows as well but given the sharp fall in U.S. equities during the month, it pays to keep an eye on the dollar and any hints of rebalancing flows.
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