Morgan Stanley (MS) highlights that in months where the stock market has rallied, the U.S. dollar tends to fall on the last day of the month.
They suggest this could be due to end-of-month dollar hedging, since when the value of stocks rises, large funds’ dollar exposure increases as well. Thus they need to hedge this off after a rally.
MS: As a purely mechanical relationship, a rally in US asset markets makes foreign investors long USD. Thus, there is the possibility that the need to hedge increasing USD exposure when markets rally may weigh on the USD going into the end of the month.
When stocks have rallied during a month, the U.S. dollar falls at month-end 62% of the time, as shown in the table above. When bonds rally, the dollar falls 59% of the time.
While Morgan Stanley apparently used 60 months of data, as always these back-test relationships should be taken with a grain of salt.
They work until suddenly they don’t.
Regardless of Morgan Stanley’s end of month study, the firm believes that overall the dollar remains undervalued against the euro, yen, australian dollar, new zealand dollar, and canadian dollar — based on econometric models for what that’s worth.
MS: The USD remains considerably undervalued against the EUR; with the median FV at 1.17, EUR/USD is now 28% too high.
With the exception of GBP/USD, which is very close to FV, the USD also remains undervalued on all other G10 crosses. USD/JPY is now 12% too low (USD/JPY FV is 100). CAD is now 14% overvalued against the USD. NZD and AUD are gaining ground; both remain very stretched indeed. NZD is 27% overvalued, and AUD is 40% from fair value. AUD overvaluation is the largest absolute misalignment in the G10.
(Via Morgan Stanley, “FX Pulse: USD Under-Seasoned”, 25 November 2009)
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