These Currency Pairs Perform Best in January
01/04/2010 10:37 am EST
The new year is now here, and as we turn the calendar to January 2010, we want to take this opportunity to talk about one of our favorite topics—seasonality.
There is an old saying in the stock market that the first five days of trading in January sets the tone for the rest of the year. Although this is not true for the currency market, what we do know is that the dollar tends to appreciate in the month of January. December was a very strong month for the dollar, which strengthened significantly against all of the major currencies as incoming economic data point to an accelerating recovery in the US economy. Over the past week, the dollar managed to hold on to most of its gains, but a further rally is contingent upon another month of moderate job losses. Forex traders will have to wait for the next non-farm payrolls report for a fundamental catalyst to drive the dollar higher, but in the meantime, dollar bulls have seasonality on their side.
The reason why we like to look at seasonality is because technical analysis is based on the idea that price patterns repeat themselves, and seasonality is rooted in this very same concept. Seasonality is defined as a pattern that occurs at given times within the calendar, and throughout the year, there are a good number of cases of seasonality.
The first set of charts illustrates the performance of the EUR/USD and USD/CHF in the month of January. In seven out of the last ten years, both currencies lost value against the US dollar in January. In other words, during the first month of the year, the dollar strengthened against the euro and Swiss franc 70% of the time. The rally was particularly dramatic this past year as the credit crisis triggered massive deleveraging, driving investors into the safety of the US dollar.
There are many reasons to explain this unique seasonality, the most obvious of which is beginning-of-the-year positioning. Typically, many foreign investors repatriate their money at year end to window dress their balance sheets or prepare distributions. In the beginning of the year, they reinitiate their positions or initiate new ones, which can typically involve reweighing their investments in US equities and bonds.
NEXT: Review of Seasonal Bias for USD/JPY|pagebreak|
The seasonality bias in USD/JPY is not as strong as USD/CHF, but it is still quite clear that the dollar tends to rise in the month of January against the Japanese yen. Although this trend has been in place for six out of the past ten years, it is also important to note that this pattern has worn off lately, with USD/JPY falling in three out of the last four years.
Seasonality does not work 100% of the time, which is why trading seasonality blindly by selling the EUR/USD at the beginning of the month and buying it back at the end of the month is not necessarily the best thing to do. The recent performance of USD/JPY is the perfect example. Therefore, the best way to incorporate seasonality into your forex trading is to simply be mindful of it. For example, it may be a better idea to look for opportunities to buy the dollar against currencies like the Swiss franc and euro next month than it would be to sell it. What seasonality tells us is where the probabilities are skewed.
By Kathy Lien of GFTForex.com