Seasonal Patterns In FX: Caveat Emptor

Seasonal patterns in agricultural commodities seem intuitively easier to understand than seasonal patterns in the foreign exchange market, where the turnover far and away exceeds the international trade. Often analysts and journalists claim a seasonal pattern in the dollar that does not meet a robust statistical standard. The sample size is frequently too small, or they are too quick to reject the null hypothesis that there is no pattern. Putting weight on an average move, as some analysis does, also seems misleading, given the variance. Alas, many might be fooled by randomness.  

With Fordham international business graduate student Nicholas Hatzis, we reviewed the major currencies and gold price action over the past twenty years, using monthly data. Because of the small sample size, we want to establish a high threshold before claiming a pattern and are suspicious if the direction was not sustained for 15 of the 20 years. In a review of our findings below, we also note patterns of 14 years as the next data point could meet our minimum threshold. 

Claims of the yen's seasonal pattern may be the most popular. Japan's fiscal year-end (March 31) is often linked to asset managers adjusting positions. First repatriation and then at the start of the new fiscal year, boosting foreign investments. We did not find such a pattern. However, August is the most notable. In 14 of the past 20 years, the dollar has fallen against the yen in August.  

The euro has been unable to reach the threshold of moving in the same direction in a given month 15 times over the past 20 years. However, it came close a few times. For example, in June and December, the euro has risen against the dollar in fourteen of the past 20 years. 

Of the major currencies, sterling has the most robust patterns. In the past twenty years, the sterling has appreciated against the dollar in 18 of the past 20 Aprils, including last month. The pattern is just as strong in May but in the opposite direction. It has fallen in 17 of the past 20 Mays. August meets our threshold. Sterling has fallen in August 15 of the past 20 years. June and November are close, with sterling advancing 14 times and falling 14 times in the past 20 years, respectively.  

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Read more by Marc on his site Marc to Market.

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