Dollar bulls remain in control despite thin trading conditions and the lack of US economic data. The greenback extended its gains against every major currency with the Australian dollar and Japanese Yen losing the most ground. The rally in US equities has evoked speculation about whether the Santa Claus rally has come early this year. According to the Stock Traders Almanac, “it is pretty much clockwork” for stocks to post gains at the end of the year. Stocks ended higher 12 out of the last 15 end of the year periods as holiday cheer translated into holiday gains. This morning, the Nasdaq hit a fresh year to date high intraday fueling speculation that equities in general may end the year at new highs.
Is the Santa rally positive or negative for the dollar?
The seven trading days from Christmas Eve to the first two days of January is typically the period that is recognized for the Santa Claus rally. This pattern was identified by Jeff Hirsch, the founder of the Stock Trader’s Almanac. We decided to take this same idea and apply it to the currency market to see how the Santa Claus rally affects the US dollar. Based upon our calculations and as indicated by the chart below, the dollar weakened against the euro 8 out of the last 10 years between Christmas Eve and the first two trading days in January.
Against the Japanese Yen, it weakened 7 out of the last 10 years. Statistically, these numbers are significant and suggest that the dollar could give back its gains over the next two weeks as the stronger performance in equities fuel risk appetite. However, we all know that this year is unlike any other, so there is a good chance that this pattern may not be repeated. For the first time since the Lehman Brother’s bankruptcy, the strength in the dollar and the strength in stocks could be a sign that the dollar is finally trading on fundamentals and not risk appetite. We have previously said the divergence between the performance of currencies, commodities, stocks, and bonds was worrisome, but today every single asset class is telling us that investors are banking on an accelerating recovery.
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Although it is unclear whether or not there will be a correction in the US dollar over the next two weeks, there is a very good chance that a breakout will not occur. Instead, we expect continued range trading as the lack of buyers and sellers lead to thin and quiet trading conditions. In yesterday’s Currency Corner article on MoneyShow.com “The Christmas Trading Range for Forex,” we talked about how the average trading range this week tends to be 25% to 50% less than the average weekly trading range in the EUR/USD.
The following is one of two charts that we included in yesterday’s article to support our point. However, by the time this article runs, currency traders will have some data to key off of with the third release of Q3 GDP and existing home sales on tap. No revisions are expected to the GDP report, but if growth were to be revised in one direction, it would most likely be lower since prior releases for retail sales were revised downwards. Existing home sales could also disappoint, having increased significantly in October.
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By Kathy Lien of GFTForex.com
