Bank of America Releases Estimate of Month-End FX Rebalancing Flows
Bank of America has released an estimate of month-end FX rebalancing flows, warning of a significant outflow from the US dollar into the euro and emerging market currencies. The outflow is driven by strong equity performance and weak bond returns in November.
US equities gained 6% this month, while European stocks fell 3.2%, and Chinese equities dropped 5.7%. US bonds saw modest gains of 0.4%, contrasting with declines in bonds across Europe and Japan. The gap between the equity performance has investors rebalancing their portfolios, leading to a significant sell-off of US dollar assets.
The bank expects selling of the US dollar to dominate, linked closely to the strong performance of equity indices. Although rebalancing flows may temporarily have a drag on the US dollar, Bank of America noted that broader factors, such as US interest rates and central bank policies, will ultimately shape the currency’s longer-term path.
Additionally, the bank pointed to potential inflows into the Swiss franc, driven by strong global equity gains. The Swiss National Bank’s large equity holdings, particularly in US stocks, heightens the CHF’s sensitivity to month-end portfolio adjustments. Bank of America is comfortable tactically fading the US dollar rally on the very near term on trend reversal signals, citing lower US yields and seasonal factors, including US holidays.