USD Hammered by Month-end Flows, What Are They?
USD got hammered today, with DXY slipping into the 98.50s, despite ongoing tensions between the US and China (which many had thought would keep the dollar bid).
Often markets witness unexplainable moves towards the end of the month, moves that are apparently disconnected to the fundamentals. This is down to a phenomenon called “month-end flows”.
What are month-end flows?
Some of the biggest players in global financial markets are asset managers (pension funds, hedge funds, investment funds etc.). Each of these typically sticks by “weightings rules” - i.e. they should have 40% invested in fixed income, compared to 60% in stocks, or something like this.
However, with the relative value of assets changing constantly, it is difficult for asset managers to always stick exactly to these rules - perhaps equities rally one month and bonds fall, leaving an asset manager over-exposed towards equities given its self-imposed ruling.
Towards the end of the month is when traders working at asset management companies typically seek to rebalance their portfolios, with these month-end flows becoming most evident in the final week/days of the month.
Can month-end flows be predicted?
Many large financial institutions do have “models” for predicting what assets ought to be a buy or sell going into month-end. How they calculate this is well beyond me and pretty much anyone without a degree/masters in mathematics, but often institutions make these calls reliably.
For example, a number of banks were calling for USD weakness into this month-end - maybe this became a self-fulfilling prophecy today, maybe they were right!
Banks like to show off their models in the hope they will become self-fulfilling prophecies, so towards the end of each month keep an eye out on Twitter to see if you can catch any calls!
Pro-tip: Trade with caution at the end of the month, markets can be especially choppy and unpredictable. Some traders avoid trading at this time all together!
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