Seasonal Trends in The Forex Market

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Seasonal Trends In The Forex Market

When it comes to trading the currency market, you may often find yourself making one of two
choices: pro-dollar or anti-dollar. As a component of more than 85% of all currency transactions,
the U.S. dollar has long been the primary driver of fluctuations in exchange rates. Most traders
will analyze the future direction of the dollar by using either fundamental or technical analysis or
a combination of both. However, few people realize that the time of the year could also play a
role in how the U.S. dollar behaves against various currencies. The study of technical analysis is
about analyzing past price activity through the use of indicators. There are many ways to do this
with a laundry list of technical indicators to help you look at price in different ways.
Filtering Out Noise

Most traders may not realize that there is no clearer way to analyze past price behavior than to
look at the price activity itself without the noise of indicators. When you look purely at price,
you may notice patterns known as seasonality. Seasonality is a predictable change that repeats
every year at the same period in time. For example, you may not have realized that in eight out
of the past 10 years (between 2000 and 2009), the U.S. dollar fell in the month of May against
the Canadian dollar. Or that in eight out of the past 10 years, the U.S. dollar fell against the
Japanese yen in the month of August. There are no guarantees that historical patterns will repeat
themselves but whenever a pattern has been repeated 80-90% of the time, it becomes statistically
significant – and that can be very valuable information when you are trading. In this article, we
will talk about why seasonality is an important concept in the forex market and why it should not
be ignored. (For related reading, see Capitalizing On Seasonal Effects)
July: A Positive Month for USD/JPY

One of the strongest examples of seasonality is the one in USD/JPY, which can be seen in Figure
1 below. In 80% of the samples (or eight out of the past 10 years), USD/JPY ended the month of
July higher than where it started. It is difficult to pinpoint an exact reason for why USD/JPY
tends to behave this way in the month of July, although it could be related to the end of the first
quarter in Japan or the beginning of the second half of the year in the U.S.. Either way, this
instance of seasonality is very strong and one that is worth keeping in mind if you find some
short USD/JPY trades during the month of July. The presence of seasonality may encourage you
to take a smaller-than-usual short position or to avoid longer term short USD/JPY trades during
this period.
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Source: GFT Dealbook

Figure 1
August: USD/JPY Gains Made in July Are Often Erased

There is also a strong case of seasonality in USD/JPY during the month of August. As you can
see in Figure 2, below, a good portion of the gains earned in July were erased in August. In fact,
a look at other yen crosses quickly reveals that in a calendar year August tends to be the
strongest month for the Japanese yen across the board. In other words, other currencies such as
the U.S. dollar, euro and British pound have a strong tendency to fall against the yen in August.

Figure 2
May: A Very Negative Month for the USD/CAD

For USD/CAD, the strongest case of seasonality is in the month of May. In eight out of the last
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10 years (between 2000 and 2009), the Canadian dollar rallied against the U.S. dollar that month.
The only explanation for this price pattern is the seasonality in oil prices. Canada is one of the
world’s largest oil producers and therefore Canadian companies tend to be very sensitive to the
price of oil. The tendency for oil prices to rise during March and April could have boosted the
profitability of Canadian companies, leading to seasonal improvements in economic data.

Figure 3
January: A Negative Month for EUR/USD

Cases of seasonality can also be found in other currency pairs such as the EUR/USD and the
NZD/USD. The behavior of the U.S. dollar against the euro in the month of January, for
example, shows strong seasonality. In seven out of the past 10 years, the U.S. dollar rallied in the
month of January. The reason that we typically see this behavior is because many companies and
funds tend to repatriate their money back to their local country at the end of the year to dress up
their balance sheets. In the beginning of the year, money is once again sent abroad for new
investment purposes. Because everyone starts with a blank slate as far as profits and losses go,
their main focus is to initiate new positions. The U.S. market is one of the most liquid markets in
the world, which explains why a lot of that investment money ends up there. In the case of the
NZD/USD, the currency pair has risen eight out of the past 10 years in the month of December.
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Figure 4
Implications for Traders

As traders, there are many ways that you can apply the knowledge of seasonality to improve
your trading. For example, if you are trading the GBP/USD in the month of September, as a
longer term trader you can look for opportunities using fundamentals or technicals to buy the
GBP/USD or to go in the direction of the seasonal trend. As a shorter term trader, you can reduce
your holding period if you are taking a trade that is against the seasonal trend or, like longer term
traders, you can focus on primarily looking for long GBP/USD trades. Although seasonal
patterns do not duplicate themselves 100% of the time, following seasonality rather than fading it
may improve your ability to find high probability trades.
Conclusion
Although instances of seasonality in the forex market are rare, being aware of them can help
traders become more in-tune with the outlook for their currency trades. Seasonal patterns won't
always be repeated as the data suggests,but being aware of the trends can help forex traders
understand where the probabilities lie. If there is a strong case of seasonality in a given month, it
may help to support a trade idea or provide a reason to avoid it.

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1

Seasonal Trends In The Forex Market

Filtering Out Noise

July: A Positive Month for USD/JPY

Source: GFT Dealbook

August: USD/JPY Gains Made in July Are Often Erased

Source: GFT Dealbook

May: A Very Negative Month for the USD/CAD

Source: GFT Dealbook

January: A Negative Month for EUR/USD

Source: GFT Dealbook

Implications for Traders

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