BNY’s Geoff Yu notes that USD exposure is elevated across global portfolios, with strong buying in both equities and bonds generating sizeable rebalancing signals.
The bank recommends increasing FX hedges instead of selling U.S. assets, as hedge ratios remain low and Dollar allocations high
July’s equity declines may ease pressure but do not remove the need for hedging. High U.S. allocations drive hedge demand “The USD was by far the best-bought currency, with a marginal flow score more than twice that of JPY, the next strongest. This supports our view that cross-border dollar exposure is at a record high: equity and fixed-income ownership remain elevated, while hedge ratios are low.
U.S. equities also posted a modestly positive marginal return score, so strong dollar buying and equity gains have produced a large, combined rebalancing signal.” “Dollar-selling signals from equity rebalancing are a welcome correction to stretched asset allocations. Equities accounted for 59.5% of total portfolio holdings at the end of last week, close to the early-July peak before the recent sell-off in memory-chip stocks. Relative to fixed income, equity exposure is now at a record high.” “The USD fixed-income rebalancing signal is therefore weaker than the equity signal, but elevated U.S. bond holdings still create a clear need for more hedging.” “Falling U.S. equities into month end will reduce total dollar exposure and ease some immediate rebalancing pressure.