At month-end, global funds rebalance currency hedges and portfolio weights, and much of that is executed around the 4 p.m. London fix. Banks publish estimates of these flows, and the logic behind them is simple enough to follow yourself.
The basic idea:
If US equities strongly outperformed other markets during the month, foreign investors hold more USD assets than their target weight.
Rebalancing means selling some of those assets and the USD, which points to USD selling into the fix.
The reverse applies after a month of US underperformance.
Caveats:
Estimates are often wrong in direction or size, and the market may pre-position days earlier.
Quarter-end and year-end flows are larger and less predictable.
After the fix, moves frequently reverse.
For short-term traders the practical use is mostly defensive: expect unusual moves between about 15:45 and 16:05 London on the last business day, and avoid tight stops through that window.
Do you track month-end flow estimates, or simply stand aside around the fix?
FXS Prop Desk wrote: the market may pre-position days earlier.
This is the bit that makes the signal hard to use even when the estimate is right. If every bank note is calling for USD selling at the fix, a lot of that can get traded in the last three or four sessions, so by 15:45 on the day the move is partly done and the fix itself can go the other way. A practical check is to compare how far the dollar has already moved over the final week against the size of the published estimate. Month-end also sometimes lands close to bigger events like payrolls or a Fed meeting, and those can swamp the rebalancing story completely. For a scalper the defensive takeaway in your last paragraph is really the useful part.
Watch the next one for a timing quirk. October month end falls on Friday 30 October, inside the week when the UK has changed its clocks and the US has not, so the 16:00 London fix lands at 12:00 New York instead of the usual 11:00.
A stand aside window set in New York time will be an hour early that day. I keep it in London time, 15:45 to 16:05 as FXS Prop Desk suggested, since the fix itself is calculated over a five minute window around 16:00.
On Fairman's point about positioning, I compare the dollar move over the last five sessions with the direction of the estimates. If the estimate says dollar selling and the dollar has already fallen four days straight, I expect very little at the fix.
The part I find more useful is after 16:05. The reversal the post mentions is often the cleaner trade, because the flow is a known one off. I only take it if the fix move was a third of the day's range or more, otherwise there is nothing to revert.
Does anyone treat the end of October differently because some US funds close their fiscal year then? I have read that, but never seen it clearly in the price.
