CBA Question Timing Of Month-End FX Rebalancing Flows

CBA note that "over the month of July, the global equity benchmark excluding Australia increased by 4.6%. The benchmark was also 4.7% and 4.8% higher for Europe and the UK respectively. The equity performance suggests portfolio managers are likely to buy AUD, EUR and GBP at today's 4pm London fix. In combination with its recent weakness, this can possibly push the USD lower to levels not traded since May 2018. However, there is a risk some pre‑hedging activity has already been executed. GBP/USD lifted by around 2.3% over the past week. While the strong UK retail sales and broad USD weakness assisted, it is possible fund managers rebalanced their hedges ahead of today's fix that supported GBP. Two observations on the impact of portfolio rebalancing flows are worth flagging. First, the relationship between foreign asset values and local currency is loose. For example, AUD, EUR and GBP decreased modestly in May even though global equity benchmarks increased. Second, the extent of the change in foreign asset value does not necessarily represent the extent of the change in currencies. Both of these observations could be attributed to pre‑hedging flows. They also go to show that the timing of rebalancing flows and their impact on currencies can be difficult to predict."