FX Implications: A close on the S&P below 1264.10 or above 1357.24 on Friday, March 28, is needed to generate a USD/CAD trading signal.
A significant inverse relationship exists between extreme monthly returns in the S&P500 and 1- & 2-day USD/CAD returns at the turn of each month. This reflects Canadian equity portfolio managers’ tendency to adjust FX hedges at month-end due to changes in the value of their U.S. equities holdings.
The month-to-date change (%) in the S&P500 through the 2nd-to-last trading day of a month represents a statistically significant driver of one- and two-day changes in USD/CAD near the turn of each month. This finding comports with anecdotal evidence that Canadian equity index / pension managers adjust their FX hedges at the end of each month based on changes in the value of their U.S. equity holdings. Specifically, a rising (falling) S&P500 increases (decreases) the value of U.S. holdings, requiring an increased (decreased) hedge, or USD/CAD selling (buying) at the end of the month.
Despite huge intra-month swings, the S&P is currently trading within the trading model’s parameters and has gained only 0.7% so far this month (March 26) - still well short of the 2% increase required to trigger a USD/CAD sell signal.
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