CITI: Month-End FX Hedge Rebalancing: October 2021 Preliminary Estimate

· The preliminary estimate of month-end FX hedge rebalancing needs points to slightly above average USD selling this week.
· Global equities bounced strongly in October after previous month’s losses with the US market leading the recovery. The MSCI US equity index reached a new record last Thursday, 21 October. Although US fixed income is down on the month, the gain in equities dominates and this has likely left foreign investors with US assets under-hedged.
· The signal is a USD sell even against currencies like CAD where local equities have done even better than the US ones, because we assume foreigners hold more US assets and tend to hedge them to a greater degree.
· Poor performance of Japanese assets means that foreigners may also buy JPY to reduce hedges, adding to domestic JPY buying needs. At +1.6 standard deviations, the signal to buy JPY and sell USD is strongest among major currencies this month.
· There are no major data releases or central bank speakers currently scheduled ahead of the 4pm London WMR fix this Friday.