We expect the rebalancing of hedges at month-end to lead to small USD selling. A stronger USD has led to significant shifts in the market value of bond markets in the euro area, UK and Japan. The recent shift in Fed rhetoric suggests a higher risk of an earlier rate hike, whereas policy easing has become more aggressive in the euro area. The large FX market movements have offset the relatively large decline in US equities, thereby reducing the need for FX hedging in aggregate. Assuming a static FX hedge ratio for equity and bond market investors, we expect rebalancing to result in small amounts of USD selling – the signal is weak for EUR and JPY, with a neutral signal for GBP and small USD buying versus CAD and AUD.
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