Forex Investment and Currency Trading

• FX Implications: The S&P500 closed at 1106 on September 29, well be below the support level of 1218 that was needed to trigger a USD/CAD buy 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.
The S&P 500 has declined by 13.8% so far this month (Sep 29), triggering a USD/CAD buy signal.

Figure 1 shows 1-day returns for USD/CAD and S&P returns to the 2nd-to-last trading day of the month and illustrates the inverse relationship between USD/CAD returns and the S&P’s performance.