[Dan]

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. Constructed trading rule is of buying (selling) USD/CAD for one or two days at the close of the day before month’s end if the S&P has declined (risen) on a month-to-date basis. But in the back testing, exclude those months in which S&P returns ranged between -5.0 to 2.0%, inclusive. This exclusion makes intuitive sense: Less extreme S&P returns lead to less hedging adjustments and allow for other factors to drive FX price action.