Dollar Weakness Could Merely be Month-end Flows
- Written by: Sam Coventry
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Image © Adobe Images
The Dollar has fallen over the course of this week with analysts saying month-end flows could be behind the move.
"The month-end rebalancing needs in November stand out, with USD approaching four standard deviations overweight on the month – the biggest upward move in 10 months, suggesting a need to sell to rebalance hedges," says Bob Savage, Head of Markets Strategy at Bank of New York Mellon.
GBP/USD rose 0.88% to reach 1.2694 in midweek trade, its biggest daily gain since August 23, helped by apparent month-end rebalancing and some relatively benign U.S. data releases.
"Overall, the moves in equity markets, when adjusted for market capitalisation and FX performance this month, suggest month-end portfolio-rebalancing flows are likely to be moderate USD selling across the board," says Valentin Marinov, Head Of FX Strategy at Crédit Agricole.
However, BNY Mellon thinks the rebalancing requirements are more than modest.
Its analysis suggests the biggest beneficiaries should be EUR – with massive selling and outflows in the top five of our 20-year history – GBP, and INR with MSCI rebalancing.
But, as always, trying to divine month-end trends remains fraught with difficulty.
"The factors that explain the USD rally in November – the 4% gain following the US election on the back of the Trump win and a Republican sweep – are not evident in trend or carry factors. This makes the unwind from monthly rebalancing pressures more complicated and adds to volatility as investors may not reweight benchmarks in the same way," says Savage.
He explains geopolitical factors were the main driver of Dollar appreciation, something that is not well-modelled by FX short-term investors.
Beyond the U.S. election, the collapse of the German governing coalition, French coalition worries and an escalation of the war between Ukraine and Russia were all key.
"The rush to buy USD following the US election has resulted in concerns about US year-end and month-end liquidity as well. Non-US corporations with fiscal year-ends in November and December may struggle and squeeze funding costs," says Savage.
If month-end rebalancing and flows are behind the Dollar's recent setback, then what happens once these flows are complete?
There is a sense that the Dollar's rally was already looking streteched even before month-end, so it could be too soon to suggest next week will be another week of USD outperformance.
Although most analysts we follow think 2025 will be a story of more Dollar strength, many think a pullback in December is possible.
