Big upside bias to the dollar to start the new year

With the start of 2012 comes the start of the strongest "seasonal" trading pattern of the year for the US dollar. That would be the one for the month of January. Going back to 1982, the first month of the year has been up 2/3rds of the time, averaging a gain of 0.89%. For those who have a statistics bent, T-Test analysis indicates this is significant at a 97% confidence level. (It should be noted that I'm not actually talking about the USD Index here, but rather an equal weight index calculated using the USD exchange rate against the other majors, though indications suggest the results for the USD Index are quite similar).

And for those who think these sorts of patterns degrade over time, consider the fact that the USD has been up 9 out of 13 Januarys since the launch of the euro in 1999, with a very similar average monthly change. This figure isn't as statistically significant because it includes fewer observations, but it's meaningful never the less.

Why is this the case?

I can't give you a definitive answer, as I'm not involved in that side of the business, but I can venture what I think is a good educated guess. It likely has a lot to do with the corporate capital flows as US multi-nationals repatriate overseas earnings as they close up the books for the year gone by. There's been a lot of talk in recent years about money sitting overseas to avoid US taxation, but that's likely overstated.

So why is this important?

Given the recent negative correlation between the USD and stock prices and interest rates, the expectation of a rising dollar during January would tend to suggest weaker stocks and lower yields. Just keep in mind, though, that correlations change. As the chart below shows, the correlation between the USD Index and the S&P 500 (lower red plot) has been moving toward 0 of late and actually got well into positive territory a couple times in 2011.

USD Seasonal Chart

 

The other risk management consideration is that a strong seasonal pattern is no guarantee. The dollar may have been up 20 out of 30 months, but that means 10 out of 30 it wasn't, so caution is always warranted. As with other markets, forex seasonal patterns are good for biasing, but risky to use outright.

 

 

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