As we are heading into the last month of the year, we take this opportunity to look a one of our favorite topics in forex, seasonality. We have long discussed how, during certain months, currency pairs show a consistent bias to rise or fall and December is clearly no different. Along with the chaos of the end of the year has come a very stable and significant pattern that may hint at further dollar weakness.
A look at the price action of the EUR/USD over the past 11 years reveals a distinct pattern. Since 1998, seven out of the last eleven Decembers the euro performed strongly. Of course, the first thing that strikes you when looking at the chart is the 10.0% jump last year. Even though one might think this was a bit of an anomaly, we see similar outperformance in past years. For instance, in 2000 there was a nearly 8.0% jump, while in 2002 we saw a 5.5% rally. When it comes to this seasonality study, it turns out that magnitude is more important than probability. Even though 7 out of 11 are not very trustworthy odds, it is more important to focus on the fact that if December did result in a loss, those declines were capped at -0.47%. This end of year flow may be indicative of foreigners selling dollars and repatriating those funds back home.
A number of factors may be behind these patterns including fiscal year end flows, demand for commodities, import and export trends or even travel. However, for whatever reason, pairs other than the euro, kiwi, and aussie did not show as significant results.
Trading Seasonality
As you can see from the charts above, seasonality does not hold 100 percent of the time, so the best way to incorporate it into your FX trading is to simply keep it in the back of your mind. For example, it may be better to look for opportunities to buy NZD/USD in the month of December than to sell it. Seasonal trades do not always duplicate themselves, which is why trading seasonality blindly by selling at the beginning of the month and buying it back at the end of the month may not always be the best thing to do, but what seasonality does show us is where the probabilities are skewed.
Comments