Global Rates & FX Watch: Jun FX rebalancing – From EM ex-China into GBP & EUR

研报英文原文证据摘录

Global Rates & FX Watch: Jun FX rebalancing – From EM ex-China into GBP & EUR

Methodology

We estimate FX rebalancing needs based on a conventional 60/40 portfolio of global

equities and bonds (see Estimating FX rebalancing needs from 8 April 2024). This

framework is a simpler version of the one used to estimate pension fund rebalancing

flows.

The allocations for each of the assets in the equity and bond sectors of the global

portfolio reflect the weight of the asset as a fraction of the broader market equity and

bond markets. These weights are obtained from external sources (e.g., Securities

Industry and Financial Markets Association-SIFMA and International Capital Market

Association-ICMA) and to a broad extent reflect the relative liquidity of each asset. We

anticipate revising these weights on a yearly frequency. Outside of these revisions,

these weights are left static, and the underlying assumption used to calculate FX

rebalancing needs is that the aggregate global portfolio rebalances monthly or quarterly

back to these weights.

We track the performance of each asset with a corresponding unhedged total return

benchmark. At month- and quarter-end, portfolios are expected to rebalance out of

overperforming assets and into underperforming assets. In our framework, we calculate

the rebalancing needs in both relative terms (%) and Z-Score form (using 3-year of data).

Caveat to the framework

We note that (1) the magnitude of rebalancing for an asset is proportional to the

significance of the underlying trend, and (2) while rebalancing flows work against these

trends in the last sessions of the month or quarter, one should not expect these to be a

material catalyst for the reversal of the underlying trend, as these broader trends are

generally driven by macro factors.