Quarter-end and month-end flows set to stir FX markets

While economic data is set to be a focus, traders should also be alert to month-end rebalancing. September also closes the third quarter, potentially adding another dimension of volatility from flows as trading concludes for the month.

UBS's month-end rebalancing model highlights USD/JPY as the main sell signal this cycle. The investment bank notes that although the S&P 500 has beaten other G10 equity indices this month, this has not produced similarly distinct signals elsewhere in FX. Apart from the USD/JPY recommendation, UBS finds that most other G10 currency pairs display either weak or misaligned signals when compared with equity performance.

Nevertheless, UBS added a caution that the model's predictive ability has been fairly limited lately. Therefore, this should not be viewed as a clear directional trade but rather as a warning that rebalancing flows may amplify price moves later in the session.

UBS's stance is especially noteworthy when set against BofA's month-end flow indicators, which indicate selling of the yen and pound alongside euro buying. The two models appear to conflict, offering traders no clear direction on the yen.

That contradiction is likely the key takeaway. Month-end models are not forecasts per se, but they can help account for unusual movements when liquidity is low and large portfolio flows enter the market.

As month-end and quarter-end coincide today, one should be wary of overinterpreting rapid FX moves around the fixing window. Some of the odd price action may just reflect the influence of flows.