Month-end flows may add to FX volatility after busy week

Traders already have a packed calendar this week, and month-end flows could add to the mix.

Here is a look at what banks are forecasting for October's month-end flows and their potential effect on major currencies.

Barclays points to a mild dollar buying signal versus most major currencies, but lacks a clear bias against the euro or yen. This indicates a slight positive lean for the dollar, though not significant.

Deutsche Bank, meanwhile, expects a more varied outlook for the dollar, with its month-end rebalancing model suggesting cross-currency flows could have a larger influence.

Specifically, they note strong selling pressure on CHF/JPY, supported by a 13% month-to-date performance gap between Swiss and Japanese equities. They also see buying interest in EUR/GBP, driven by an approximate 6% differential in European and UK equities, as France-related concerns prompted rotation into UK banks and defence stocks.

(The month-to-date differentials are from Deutsche's time of writing for the month-end report.)

These flows usually occur as fund managers rebalance portfolios after monthly movements in stocks and bonds. That can generate temporary buying or selling pressure in major currencies, especially around the 4pm London fix.

Overall, the signals this month do not indicate anything significant for the dollar. This could lead to less dramatic moves, given that markets remain focused on the Fed decision and how Treasury yields and US tech stocks respond to recent events.

In any case, these flows should not be seen as a definitive directional signal. They are hard to predict and gain relevance nearer to the fix. Consider them part of the picture, not the primary driver of price action.