Top 3 Forex Seasonal Trends in May

05/05/2014 9:00 am EST

Focus: FOREX

Trading on seasonal patterns alone is a recipe for ruin but they’re another tool in the forex trading toolbox, says Adam Button of ForexLive.com.

The past few months, including April, showed the value of trading seasonals so long as you keep a close eye on the risks. For May, three trends stand out.

#3: Dollarama - May is the best month on the calendar in the last decade for the Dollar Index and the second-best over the past 30-years (after January). So far this year, the Dollar Index has matched the seasonal pattern in each month this year.

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It’s not tough to paint a fundamental picture of dollar strength for May. All it would take is a Spring resurgence in economic data. Alternatively, a harsh round of risk aversion or trouble in Ukraine could cause a flight to dollar safety.

#2: May is a bad month for commodity FX, especially lately. April is the best month of the year for AUD, NZD, and CAD but the trend reverses in May. Over the past 30 years, on average it’s the second-worst month for AUD and NZD and the third worst month for CAD.

What’s more interesting is the trend within the trend. The seasonal weakness in the trio has been severe since 2010. The average loss in that time is 3.2% for CAD, 4.9% for NZD, and a whopping 6.4% for AUD.

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What’s especially interesting about the Australian dollar this year is that it has followed the same rough outline as 2013, with a an interim low in early March and a high in mid-April. It was around this time last year that AUD/USD embarked on a two-month, 13-cent plunge.

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Unfortunately, the fundamentals don’t line up for that kind of fall once again unless China blows up. Still, some global economic jitters, housing problems, or simply a soft round of economic data might be enough to spark a meaningful fall in the Aussie. There’s certainly some indications in the CFTC positioning data that show AUD longs getting a bit crowded.

#1: Euro will hit the skids on a bad headline - May is by far the worst month of the year for the euro, averaging a 1.4% loss over the past 10 years. The trend fades when you extend it to the euro’s inception, but May euro weakness has been particularly pronounced in the past four years, partly owing to a series of negative Eurozone political headlines in May.

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To me, this trade will need some ECB help but it makes sense from a risk-reward perspective. On the topside, you have ECB desperately defending 1.40 with every jawbone muscle they have. If they back that up with a hint at rate cuts in June, it could be a quick slide to 1.3700 and below.

By Adam Button, Editor, ForexLive.com

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