RBC: Month-end signals to be short USD at today’s close

Analysts at RBC say their month-end signals will be short USD vs GBP, AUD, CAD and NOK at today’s close.

“Anecdotal evidence suggests that month-end flow in FX markets is significant and that at least part of that flow reflects equity managers adjusting hedges to account for month-to-date returns,” RBC Capital Markets personnel said.

The rationale is that that rising prices raise the value of foreign investors’ US equity holdings leaving a requirement to sell USD forward for the proportion of portfolios that is hedged. However, RBC says there is no evidence that this relationship holds in reverse, as it seems US equity managers leave their foreign holdings largely unhedged or simply are not large enough to matter.

In this regard, the bank says that the effect of month-end hedging is restricted to USD, is unidirectional, and only US equity returns matter.

There are four key trading rules in RBC’s model to position for month end FX moves.

If the S&P rises (falls) by 0.8% month-to-date buy (sell) GBP/USD on the last day of the month
If the S&P rises (falls) by 1.0% month-to-date add long (short) AUD/USD on the last day of the month
If the S&P rises (falls) by 1.2% month-to-date add short (long) USD/CAD on the last day of the month
If the S&P rises (falls) by 1.5% month-to-date add short (long) USD/NOK on the last day of the month
Of note, over the last month the S&P 500 is up around 5%.