The other day there was a post looking at the May seasonal biases for the USD. It talked about this month being the strongest for the greenback over the last five years. While that may be true, five years of monthly figures is definitely not enough to draw much in the way of statistically significant findings. In that short a period of time, we really need to have a look at potential causality to see if the pattern is likely to persist in 2014.
Fundamentally, May does not stand out as a month which suggests itself as a candidate for a strong seasonal pattern. It is not a time of year where we would expect to see major international capital flows that way we see around year-end. Nor it is even a quarter-end month.
So what might be the explanation for May being a good month for the USD?
Well, stock market performance could be a big part of it – or at least the psychology related to that performance. You see, as the monthly S&P 500 chart below shows, in three of the last 5 years the US market has been down in May – in a couple of cases quite sharply.
Now consider that for much of the time since 2007 the markets were in a risk-on/risk-off binary type of state where asset markets like stocks and safe-haven markets like the dollar moved largely in opposite directions. This could be a significant factor in why the dollar has done well in May in the last few years, especially against the likes of the EUR and AUD as that previous blog post indicated. The question to be considered now is whether the conditions are in place for a similar sort of story to unfold this year. Are we in a risk-on/off type market and are stocks likely to struggle over the next few weeks.
Certainly there are voices calling for a “Sell in May and go away” approach to the equity markets at this point. Personally, though, even if that’s the case I’m not a big fan of the current USD set up. It looks weak in the weekly timeframe to me.
In terms of the seasonals, my own research does indicate a positive general USD pattern this month based on a 30 year sample. EUR/USD is not really part of that equation, however. It has been just about a 50/50 bet in May since inception. The AUD and GBP have both been on the receiving end of that dollar strength, and to a lesser degree so has the JPY. Interestingly, however, the CHF has been on the other side of things. These are perhaps worth keeping in mind as you trade this month.