May was a very strong month for the U.S. dollar and that was no surprise to our readers because we shared this chart at the beginning of the month showing how well the dollar performs in May. With last month’s gains, the positive seasonal bias continued for 7 straight years but on this first day of June, we are more interested in how seasonality affects currencies in the new month.
Which is why we updated our seasonality tables –
As you can see, there’s a negative bias for the Dollar Index in June. After strong performance in May, profit taking tends to drive the greenback lower in June. The seasonal trends are strongest for GBP/USD, EUR/USD and AUD/USD. However the gains in general are relatively modest with the dollar giving back only part of the past month’s moves.
Seasonal trends are important but with the Federal Reserve poised to make a major decision in June and the U.K. holding a referendum on E.U. membership – this year’s unique factors could easily overshadow seasonal trends. With that in mind, if the U.K. votes to remain in the European Union (and we think they will), the corresponding relief rally could drive the dollar lower against sterling and other high beta currencies.
March is the fiscal year end in Japan and there tends to be a significant amount of repatriation of foreign earnings as companies look to window dress their balance sheets. This leads many investors to believe that USD/JPY will have a downward bias this month. However taking a look at how USD/JPY has behaved in March between 2001 and 2013, we can see that seasonality has very little impact on the currency pair. In fact over the past 6 years, USD/JPY appreciated 5 times in March. Therefore while seasonality is interesting, it should not be blindly traded.
There is a very old saying in the stock market that goes “Sell in May, and Go Away.” This pertains to the notion that investors should cash in on their investments this month and take the summer off because June, July, August and September have traditionally been some of the worst months in the equity market.
Over the past decade, this adage has held true. If you were to sell the S&P 500 at the end of May, you would have avoided an loss over the past 10 years. For the EUR/USD however you would have lost out on a gain but selling USD/JPY in May would have been a great idea because the currency pair fell steeply between June and September.
Looking beneath the hood however, the decision to sell in May and go away for the summer is not so easy for currency traders because if you did so in 2009 and 2010, you would have missed out on big gains in the EUR/USD. Between June and September of 2009, the EUR/USD appreciated more than 3 percent and in 2010 it rose nearly 11 percent.
This year, there is a reasonable chance that stocks could continue to fall, leading to more risk aversion in currencies because US data has been mixed and central banks are returning to easier monetary policies. However following seasonality without following stories blindly would be a big mistake.
At the end of last year, I posted an article on FX360 about the seasonal factors in the EUR/USD during the month of January. At the time, I had said that the euro has a strong historically tendency of falling in January. Although the month is far from over, so far, its been spot on. The EUR/USD started the month at 1.3384 and is now trading around 1.29. Someone pointed out in the comment section of the article that over 40 years, there is no seasonal consistency. Perhaps he is true, but in 7 out of the last 10 years (8 out of the last 11 if you count 2000), the EUR/USD declined and so at bare minimum – it is not something we should ignore.
A lot has been said about non-farm payrolls. Read my in depth NFP insight for more details or follow my twitter feed http://www.twitter.com/kathylienfx
More than 3 weeks ago, I talked about how USD/JPY has a strong tendency to weaken in the month of August (see post: USD/JPY Falls 10 out of the Last 12 Augusts). The year 2010 was no different as USD/JPY ends the month down nearly 3 percent.
At that time, I said “Although seasonality does not equal a certainty of USD/JPY weakness, it is worth noting that 83 percent of time, USD/JPY has ended the month lower by an average of 2 percent. Considering that USD/JPY started the month at 86.46, a 2 percent move would put it below its November low of 84.83.” Not only did we reach that level, but USD/JPY fell to a low of 83.53 last week – seasonality has proven to be effective once again!
Here are the latest stats: