Citi: The month-end FX hedge rebalancing model is published with T-6 days to month end, given the recent moves in markets. It suggests small selling of USD against all G10, except the EUR on 30th August. The signal is quite weak with only the USDJPY signal reaching the 0.5 historic std. dev. threshold.
The summer turmoil and rising political tensions caused equities to underperform across the board. UK saw the largest losses at -6.2% as Brexit fears weighed in while US and Eurozone equities also fall nearly -3%. Bond markets, on the other hand, posted strong returns with UK bonds gaining +3.2% followed close by US bonds rallying by +2.6%.
Our estimated signal to sell USD is likely to be driven by equity investor rebalancing needs. Underperformance of Japanese equities drives the USDJPY sell signal to 0.76 std. dev. Given the relative positive performance of euro area fixed income, foreigners need of hedging euro area asset are partially offset by the hedging needs of euro area investors. This causes the overall hedge signal to flip to a weak sell EURUSD signal at -0.2 std. dev.
The main risk around month end comes from political headlines following the Jackson hole symposium and the G7 summit as well as US sentiment indicators, Italian economic data and Japanese industrial production.