The US equity close and the dollar

[Fairman]

The US equity close and the dollar

At 4pm New York, US stock markets close. Large rebalancing flows hit the currency market in the minutes before and after, tied to equity portfolios held by foreign investors.

When US stocks rally strongly during the day, foreign holders of US equities have more dollar exposure than intended and may sell dollars to hedge, which tends to weigh on the dollar into the close. After a sharp equity fall, the flow reverses.

The effect is modest, and mixed with other factors, such as the London fix at 4pm London time, which is earlier, and the New York close of currency trading at 5pm.

A pattern that sometimes appears is a small, one-directional move from 3:30pm to 4:15pm New York, correlated with the day's equity performance.

Testing involves aligning each day's equity return with the currency move during that window and measuring the correlation. The effect may be weak, but if present, it offers a context filter.

Practical use is limited. It's a tendency, not a rule, and the late-day period has its own noise.

Still, knowing that equity portfolios generate currency flows around the close adds another layer to understanding afternoon price action.

Does the day's equity return explain anything about the dollar's move in the last hour?

[Fairman]

The US stock market closes at 4pm New York time. Around that time, there can be flows as funds adjust positions, and sometimes the dollar moves along with equities, especially on days with strong risk sentiment. After the close, forex liquidity thins out further, leading to rollover at 5pm. The last hour of US stock trading can be busy, with index rebalancing and other flows on certain days, which may spill over into currencies. Month end and index rebalancing days can make those flows larger than usual.

[Amanhasnoname]

I tested this on EURUSD and USDCAD over about 90 trading days by logging the S&P move from the open to 3:30 New York and the currency move from 3:30 to 4:15. The correlation was weak, around 0.2 on EURUSD, but it was visible on the days when the index moved more than 1.2 percent. On those days the dollar leaned the expected way into the close roughly six times out of ten, and on ordinary days it was basically noise.

I would not trade it as a signal. What I did was use it as a tie-breaker. If I already had a short dollar idea at 3:30 and the equity market had rallied hard, I held the position a little longer, and if the stock market was flat I took profit earlier.

I also noticed that the final minutes before 4pm often had a small reversal, probably from the fix and from stops running, so I avoid entering fresh trades in the last five minutes before the stock close. That alone saved me a few annoying losses.