RBC Capital Markets recently published an interesting sell signal for the U.S. dollar early next month.

The premise is that if the S&P 500 Index moves more than 3 percent in a month in either direction, global equity portfolio managers would need to adjust their currency hedge against U.S. dollar exposure.

If the value of U.S. stocks go up, they need to short more U.S. dollar against their local currencies.  If the value of U.S. stocks go down, they need to unwind some of their short position of U.S. dollar against their local currencies. 

Equity portfolio managers tend to adjust their forex hedge, if they need to, at the beginning of each new month.

RBC found that this phenomenon can be a significant driver in the forex market in the first two days of a month.

In September, U.S. equities fell more than 3 percent.  In the first two trading sessions of October, buying the U.S. dollar against an equally-weighted basket of Australian dollar, Canadian dollar, Norwegian krone and Swedish krona produced a two-day gain of 2.2 percent, according to senior currency strategist David Watt of RBC.

In October, the S&P 500 Index is on pace to surge more than 10 percent for the month.  For Nov. 1 and Nov. 2, therefore, the signal would suggest selling the U.S. dollar against the four G10 currencies mentioned above.