The foreign currency market is enormous (roughly $4 trillion in daily turnover as of April 2010) and made up of major banks, funds and investors with huge investments in personnel and technology. It would seem strange, then, to think that there would be any sort of seasonality – it should be arbitraged away almost as quickly as it becomes evident.
SEE: Introduction To Currency Trading

And yet, it does seem that the U.S. dollar has certain seasonal regularities to its trading patterns. Why should the dollar have any sort of seasonality in its trading, and is this something that investors can look to as a trading opportunity?

The Case for Seasonality
If an investor examines the long-term history of the trading patterns of the U.S. dollar, he or she will notice that the dollar is often stronger in the first half of the year, with highs in the spring or early summer and lows in the mid-to-late fall. These patterns have shown up in the U.S. dollar-euro, USD/British pound, USD/yen and USD/Swiss franc pairs year after year – not every year, but more often than random chance would seem to suggest. (For related reading, see Using Currency Correlations To Your Advantage.)

Looking more specifically, January is often a flat-to-up month, while September is often negative for the dollar, negative for stocks and positive for gold. This September data is not always universally true, though – the dollar tends to be much weaker against the Swiss franc and Japanese yen, for instance, than against the euro.

It should also be noted that these seasonality trends can be tenuous. In many cases, it comes down to a "60/40" breakdown instead of 80/20 – that is, the trends hold up in about 60% of cases. In 2011, for instance, there was almost a total reversal of these common trends. Moreover, these monthly or seasonal trends don't often all hold up in the same year – in other words, March or May may follow the traditional pattern, but September of that same year may not.

Here too it is worth discussing seasonality and randomness. Without going into a long dissertation on statistics, these seasonal trends do not show especially low "p-values." This means that investors cannot convincingly state that these effects are real and not just random anomalies. Randomness is a real issue in trend-following as many supposed "trends" aren't trends at all and are instead data artifacts.

What does that mean for forex investors? It means that these seasonal relationships cannot be wholly trusted. These patterns reoccur often enough to be worth exploration, but they simply cannot be validated by statistical methods. Smart investors, then, should take the attitude of "trust, but verify" - consider trying to play the seasonality of the dollar, but do so only with careful loss-mitigation strategies. (Uncover the predictable behaviors of some currencies throughout the calendar year. For more, see Seasonal Trends In The Forex Market.)

Reasons for Seasonality
Lending a little support to the idea that the seasonality is real is that there would seem to be some plausible explanations for why such seasonality could occur.

Look at the early-year trading patterns. This is a time where investors have repatriated money at year end (leading to a weaker dollar) and then look to re-establish positions in the New Year. Along similar lines, it is not uncommon to see investors correct for end-of-year window-dressing (buying successful positions near the end of a period to give the illusion of proper portfolio positioning). Early in the year is also the time where investors initiate forward-looking full-year trading strategies and the volumes can reflect these moves.

The spring-fall seasonality may also have some explanations to support them. Japan, Canada, and the United Kingdom all pass their budgets in the spring, with most of the votes in April or May. With the United States, the fiscal year begins in October, but the budget wrangling often occurs throughout the spring. At the same time, U.S. tax receipts are typically highest in April and funding needs are their lowest. This has long had an influence on the bond and bond futures market, and it does not seem like such a great leap to suggest that it could spill over into the currency markets as well.

Historical Trading Patterns to Trade on
ne method to look for is the January Forex Effect. It is the historical tendency for the U.S. dollar to hit a half-year high or low during January, which eventually becomes the absolute high or low. For example, the yearly high or low has been made in USDCHF in more than 50% of the years since currencies became floating. To capitalize on this, keep an eye out to see if the USD or CHF has appreciated or depreciated in January and then take the flip side.

Another currency pair with the USD to look at for July 2012 is the USD/JPY. From 2000 to 2009, the USD/JPY has ended the month higher than when it started. Might be worth going long.

Figure 1 - Source: GFT Dealbook

The last currency pair we'll look at with the USD, is the EURUSD. There has been an average change in this currency pair of about 17% over the past 16 years. If the Jan. 4, 2012 high of 1.3073 holds, this would suggest a fall to 1.0851. However it is important to note the market does wild things so traders should be vigilant when exercising this trading strategy. You can see the previous price activity in this chart below:

Figure 2 - Source: GFT Dealbook

The Bottom Line
Is there a tradable seasonality to the U.S. dollar? Eyeballing the charts suggests that there very well may be – it doesn't come with mechanical regularity, but it does seem to happen more often than not. Still, the numerical data suggests that investors must at least think through this a little further. From a statistical perspective, there really aren't that many data points for post-Bretton Woods currency trading pairs. Couple that with what appears to be a weak seasonal trend and all of this talk of seasonality in the dollar may well be misreading random data and finding patterns where none actually exist. (For related reading, see Capitalizing On Seasonal Effects.)

So what's an investor or trader to do? It's hard to ignore a money-making opportunity, particularly when the timing of international budget cycles could offer some logic as to why the dollar would be strong or weak at various points. Likewise, although the trend of weak Septembers for equity trading makes no particular logical sense, many institutions are much more willing to sell at the first sign of trouble than they would be, for instance, in March.

Traders should not base their entire forex trading strategy on exploiting seasonality – the signals are just too weak. That said, 60/40 seems like an anomaly that can be profitably exploited. It would seem that investors can use loss mitigation strategies to take advantage of these trends while also limiting the potential losses if turns out to be an "off year" for that particular seasonal play. In other words, be willing and open to the possibility of playing seasonal trends in the dollar, but be willing to pull the plug when reality goes in a different direction.

Related Articles
  1. Forex Education

    Explaining Uncovered Interest Rate Parity

    Uncovered interest rate parity is when the difference in interest rates between two nations is equal to the expected change in exchange rates.
  2. Forex Education

    Top 6 Most Tradable Currency Pairs

    The most frequently traded currency pair is the euro/U.S. dollar. The euro is the base currency in the pairing, while the dollar is the quote currency.
  3. Forex Fundamentals

    How to Buy Chinese Yuan

    Discover the different options that are available to investors who want to obtain exposure to the Chinese yuan, including ETFs and ETNs.
  4. Markets

    What Slow Global Growth Means for Portfolios

    While U.S. growth remains relatively resilient, global growth continues to slip.
  5. Economics

    Will a Hike in Interest Rates Affect the US Dollar?

    Learn about how rising U.S. interest rates affect the U.S. dollar and where the dollar could be heading once the rising rate cycle begins again.
  6. Economics

    How Bitcoin Helps People Bypass Government Currency Control

    Bitcoin has helped ordinary citizens in some countries bypass government controls over free exchange conversions.
  7. Forex Education

    9 Tricks Of The Successful Forex Trader

    These steps will make you a more disciplined, smarter and, ultimately, wealthier trader.
  8. Economics

    What Bitcoin Regulations Look Like Around The World

    Bitcoin is still so new that countries are struggling to make legislation catch up with technology. Some nations are more open to virtual currency than others.
  9. Mutual Funds & ETFs

    An ETF for Dollar Bulls: PowerShares UUP

    A look at PowerShares US Dollar Index Bullish Fund ETF.
  10. Forex Education

    4 Of The Most Popular Traded Currencies

    Every day, trillions of dollars trade in the forex market. Here are a few of the most popular currencies, and some characteristics for each.
  1. How is the value of a pip determined?

    A pip in foreign exchange trading is a measure of a price movement in a currency pair. "Pip" is an acronym for price interest ... Read Full Answer >>
  2. How are NDFs (non-deliverable forwards) priced

    The price of non-deliverable forward contracts, or NDFs, is commonly based on an interest rate parity formula used to calculate ... Read Full Answer >>
  3. What are the goals of covered interest arbitrage?

    The goals of covered interest arbitrage include enabling investors to trade volatile currency pairs without risk as well ... Read Full Answer >>
  4. What is the difference between a Nostro account and a regular bank account?

    The term nostro account is a bit of an umbrella term and can have different meanings for different contexts. For instance, ... Read Full Answer >>
  5. What types of companies benefit from reporting results utilizing constant currencies ...

    Any company that does a substantial amount of business in foreign countries, and is therefore subject to foreign currency ... Read Full Answer >>
  6. What are the benefits of financial netting?

    Financial "netting" is a general and somewhat colloquial term. It is used to describe the act of consolidating multiple transactions ... Read Full Answer >>

You May Also Like

Hot Definitions
  1. Take A Bath

    A slang term referring to the situation of an investor who has experienced a large loss from an investment or speculative ...
  2. Black Friday

    1. A day of stock market catastrophe. Originally, September 24, 1869, was deemed Black Friday. The crash was sparked by gold ...
  3. Turkey

    Slang for an investment that yields disappointing results or turns out worse than expected. Failed business deals, securities ...
  4. Barefoot Pilgrim

    A slang term for an unsophisticated investor who loses all of his or her wealth by trading equities in the stock market. ...
  5. Quick Ratio

    The quick ratio is an indicator of a company’s short-term liquidity. The quick ratio measures a company’s ability to meet ...
  6. Black Tuesday

    October 29, 1929, when the DJIA fell 12% - one of the largest one-day drops in stock market history. More than 16 million ...
Trading Center