Month and quarter ends are always interesting times in the market, with all kinds of capital flows offering the potential to move markets. This time of year in particular we also have Japanese fiscal year end to add to the mix. As we near the finish this quarter, though, I’d like to take a look at what might be coming our way in the next one. Specifically, I want to take a look at the research I’ve done on forex seasonal trading patterns to see what’s ahead for the market.
April is not a very strong month for the USD. In fact, statistically it has been one of the worst. Looking at data back to the early 1980s, we can see that in general terms the dollar has fallen about 60% of the time and lost about 0.5% in value against the other major currencies (I’m not specifically using the USD Index here, but close). The pattern is even stronger since the introduction of the euro. Going back to 1998, the dollar has been down 61.5% of the time for an average annual loss of 0.72%. Only December has a more negative pattern.
One thing that is worth noting, though, is that we would expect to see a positive transition over the next few weeks. We can see that on the chart below, which looks at the 1-month forward returns on a week-by-week basis (measuring 7-day periods, not calendar weeks).
The featured area is the next 4 weeks, with week 14 representing April 1 to April 7. We can see we start April off in a period of strong negative indications for the dollar, a pattern which began a couple weeks ago. That shifts from negative to positive as we get into the middle part of April, though.
As for what to play on the other side, the pound is the major currency with the best April statistics. The GBP been up in general terms nearly 70% of the time during the month since the euro launch for an average 0.45% gain.
We would therefore expect GBP/USD to have a strong positive bias heading into April and that is indeed the case, as the weekly returns chart shows.
Notice here, though, that the pattern shift is much more swift, if also more abbreviated.
This seasonal bias information isn’t a suggestion to go out and get long GBP/USD, though. These biases are just that, biases. There are no sure things and even when the market does move in line with tendencies it can do so in a very choppy fashion. As such, you would likely be better off using this information to help shade your trading – like perhaps being more aggressive on trades you do in the direction of the bias and less so against it.
It’s all about putting the odds as far in your favor as possible. This sort of data, if used prudently, can help you do that.
Now, as to what this means for the global markets…
That’s a bit trickier now that we aren’t seeing the same market patterns that we were seeing in the past whereby the dollar and stocks and interest rates all had pretty well-defined relationships. As a result, we need to be aware of whether the market is in “risk” mode whereby stocks and commodities are rising and the dollar is falling, or in the recent mode whereby the dollar and US Treasury yields have moved together, mainly as a function of whether the market sees more QE coming from the Fed. I personally don’t expect anything like that, but Bernanke has done is best to keep the markets thinking he’s inclined to maintain an accommodative monetary policy and doesn’t want to see long-term rates rising too much.
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