We have a good question here from Asanka asking which currency pairs are usually affected by month end or quarter end flows? And, you know, is there some pattern that we can use and how can we use this info in our trading? So thanks for the question Asanka.
The answer that is not really any, you know, usual suspects so to speak with regards to month end and quarter end re-balancing it will be different from month to month and from quarter to quarter, depending on how the value of assets has changed during that time.
So remember that portfolio managers will have specific benchmarks set for the currency hedge ratios or the pre-determined currency exposure, according to their portfolio composition and the allocation. So there isn’t any usual suspects so to speak it all comes down to how much asset values have changed in the month or during that specific quarter. Now investment banks often have very specific month end currency re-balancing models that generate signals on way the strongest rebalancing is most likely to take place in terms of the GTN currencies.
Now, these models are more complicated than they might seem because they don’t only look at the currencies that moved, the most or the least, it also takes portfolios into account, which means that it looks at a wide range of asset classes, equity performance, for example by market cap for all the major currencies.
So all of this means that without a very accurate investment bank re-balancing model, it will be difficult to establish the potential flows on your own by just looking at the major currencies itself. Now the good news is that certain investment banks will often notify their clients when they’re expecting you know, certain potentially large re-balancing flows and some banks also release the info on a cell site, you know, which can give us good insight into what we might expect from potential month end or quarter end flows.
The big question is you know, how can we use this information in our trading?
Now, as we said without the model, you know, we need to rely on the investment banks and the analyst sharing the information with us, which means that, you know it’s not going to be a consistent flow of information that we’re getting. Secondly, because we only hear of possible strong selling or strong buying of a particular currency without the actual model we don’t know just how strong the expected buying or selling will be and that makes it a little bit tricky to try and profit from these type of moves.
However, you know when we’ve had I mean, huge, huge, huge moves in terms of volatility during a month, you know, really high cross asset class movements.
These types of re-balancing are often gonna be a little bit larger than normal and can create more sustainable moves so usually traders will, you know look at the last trading day of the month at the London Fix for these moves to play out, but often time you know the market can move before the fix in anticipation of a very strong re-balancing flow at the end of the month or the end of the quarter as well.
So, if a couple of investment banks are seeing the same thing, you know, it makes sense for them to actually front run the move and get ahead of the expected move to capitalize on that expected moves either up or down in those currencies.
Now from a retail trader perspective, it’s always going to be a little bit of a gamble because we don’t know for certain when the moves are gonna be specifically linked to re-balancing, how much it’s gonna be, you know especially if there’s other capitalists in play in the market as well during that time, it might be a little bit difficult to make a strong call on the type of move.
So it’s good to be aware of, especially if we’re actively trading one of the currencies that are expected to have strong flows with its outdoor in.
So definitely something important to keep in mind but not something that, you know, you’ll be able to necessarily profit from consistently month in and month out.