Quarter-end: the month-end effect, amplified

[Fairman]

Quarter-end: the month-end effect, amplified

Quarter-end carries all the month-end rebalancing and adds balance sheet management by banks and corporate hedging on top. The last two days of March, June, September, and December often show unusual behaviour in funding markets, and that bleeds into currency prices.

The most visible effect is on forward points and cross currency basis. Spot scalpers feel it as odd volatility late in the London day, strange behaviour around fixing times, and wider spreads in some pairs.

A few things to watch: large moves with no news, sharp reversals right after the London fix, and unusual behaviour in USDJPY and EURUSD in particular.

None of this gives a tradeable signal on its own. The point is knowing that the market has an extra driver on those days, so the usual technical logic is less reliable and risk should be sized more carefully.

Marking the quarter-end dates on the calendar and tracking results around them takes little effort and teaches a surprising amount.

A habit worth borrowing: keep a calendar with the last two trading days of each quarter marked in a different colour, and compare the results in those days with normal days at the end of each quarter. Over a few years, the sample gets large enough to say something.

Does the equity curve show anything unusual on quarter-end days?

[Fairman]

At month end, funds and corporates rebalance currency hedges as asset values change, and a lot of that flow goes through around the 4pm London fix. At quarter end, many funds rebalance more fully and some have reporting deadlines, so the flows can be larger. The direction is sometimes estimated by banks from how equity and bond markets moved over the period. For example, if US stocks outperformed foreign stocks strongly, foreign investors may need to sell dollars to rebalance their hedges, which some analysts flag as a dollar negative flow.

[Amanhasnoname]

I noticed quarter end purely by accident, because I kept a calendar of my worst days and several of them were the final Monday or Tuesday of a quarter. When I counted, 7 of my 12 largest daily losses over three years sat within two trading days of a quarter end. That is a small sample, but it was enough to change my behaviour.

What I see is a lot of strange activity near the London fix. On one September evening USDJPY ran 40 pips in ten minutes with nothing on the calendar, then returned to where it began before the New York close. My usual momentum entry took the move and I was stopped on the reversal.

So now on those days I trade smaller, around 60 percent of normal size, and I avoid entries within fifteen minutes either side of the 4pm London fix. I also avoid holding anything overnight. It is not a profit idea, only a way of removing a pattern of losses that I could clearly see in the numbers.