We're coming into a kind of silly season for the financial markets. The period around year-end and the start of the new year is one of strong seasonal patterns. We've heard about the Santa Claus rally, and no doubt stock market commentators will be bringing that up quite a bit in the weeks ahead. They may also talk about tax-loss selling, especially given the type of year we've had in the stock market. And of course December sees volumes tend to decline as the big institutions wind down their activity into year-end and folks focus more on gift shopping and holiday parties.
It must be noted, though, that some of the strongest seasonal patterns in the market this time of year are those in the forex market. That's what I want to talk about in this article. As much as I could outline a whole array of year-end patterns among the major pairs, I'm going to focus here on just the yen.
Why the yen?
Well, it's been a pretty tough year where seasonal patterns are concerned. The developments in the Euro Zone in particular have overridden the sorts of trading we otherwise would have expected to see in the euro. The yen has held much more close to form, aside from the Japanese intervention that is.
So what do we expect from the JPY in December? Here's what Opportunities in Forex Calendar Trading Patterns has to say on the subject
First of all, December is a net negative month for the yen overall, though not hugely so. What's interesting, however, is that Fridays in the final month of the year have shown a pretty clear selling pattern. By that I mean about 60% of the time the yen ends the day lower, averaging a loss of about 0.20% against the other major currencies. This may not seem like much, but it does stand out in the statistics as an outlier.
The losses for the JPY tend to be front-loaded toward positions entered early in the month, however. The pattern starts to shift in the latter part of December toward one that is more yen-positive.
Normally, it would be worth looking at EUR/JPY or CHF/JPY as a good play against the yen (and in favor of other patterns) this time of year. With the on-going EZ issues, however, and the defined linkage between the EUR and CHF by the Swiss National Bank, it might be a good idea to avoid those pairs. A good alternative would be AUD/JPY. Long positions in that pair have their strongest positive 1-month hold returns of the year for trades entered in December.
For investors, the AUD/JPY pattern for December is a good set up for carry trade strategies. The cross is one of the strongest among the majors in terms of interest rate differential and the upside bias in the exchange rate has the potential for a nice added kicker to total returns. Just be aware that there could still be considerable volatility in the rate.
For those more trading oriented, a better approach is probably to use the seasonal patterns to bias or shade your positions. For example, you could perhaps take a little more risk when trading with the seasonals and less when trading against them. In other words, integrate seasonals into your existing strategy. Do not just make them a strategy unto themselves. By doing so you could improve your risk-adjusted returns.