USD Seasonality

Some things tend to repeat themselves. Summers are almost always more warm than winters. The rainfall usually peaks during specific months of the year. Birds migrate in the anticipation of the fall. But seasonality, this inherent tendency of repetition, is not restricted to the weather or wildlife. It turns out that seasonal patterns might transpire into the forex market and provide suggestions for the U.S. dollar.

The most prominent example is the idea of summer doldrums. It ties the changes in the activity of investors to the fluctuations in the gold market. It goes as follows. People generally tend to wind down more during the summer. School is out, the sun typically shines more, and so this is the period when people typically plan their holidays. And when investors and traders go on holidays, they do not always keep track of the market as much as during the rest of the year and they might not trade as frequently.

This would in turn mean that, overall, there is less trading in the market and, because of that, prices do not swing as vigorously. As a result, the market would typically become more stagnant. Some people even go as far as to say “Sell in May and go away!”, suggesting to get out of the market in May and not come back until September. But is this really the case? Can one boil seasonality down to such a convenient sound bite? We have actually checked this for our investors. Take a look at the chart below displaying the annual seasonality of the U.S. dollar. We use the DXY Index as a proxy for the U.S. dollar. This chart shows the calculations for the year 2018, which are based on historical data from the years 2002-2018.

USD Seasonality Chart

USD seasonality chart

There’s a lot to process here but please, bear with us for a second. The most important part is the largest one with the red line reflecting the projected value of the index. This line shows how the U.S. dollar has behaved on average throughout the year. In other words, it shows the seasonal tendencies of the U.S. dollar from an annual perspective.

A short glance at this chart actually shows that there in fact seems to be some stagnation in May. So, preliminary analysis suggests that we can’t simply discard the notion of summer doldrums right off the bat. At the same time, even though the index seems to stagnate in May, there are other, more interesting, parts of the year.

One potential suggestion is that the period from April to September is the time when, on average, declines occurred. Overall, this might be a suggestion that the end of the first quarter of the year is the time when the U.S. dollar might display weakness against other currencies. Conversely, October could be the month when the greenback shows exceptional strength.

If you are wondering, the above chart comes from one of our tools, True Seasonals. Using this tool, you can analyze not only the U.S. dollar, but also gold, silver, mining stocks and indices. If you are curious about a specific part of the year, you can use the tool to zoom in on a given quarter or even month. The tool also gives you a measure of the reliability of its projections. The green line shows the value of Quality of Projection – our internal measure designed to show you whether the indications of True Seasonals are strong or only optional.

Hang on a sec, surely there’s more that influences the U.S. dollar than only the part of the year we are in? You would be right to ask that question. Some investors and traders have been mystified by the trading activity around the expiration of futures and options. These dates do not always fall on the same day of the month and are typically not considered in seasonality analyses. Luckily, we have worked to include this factor in True Seasonals. So, when you are peering over the charts of True Seasonals, the influence of the expiration of derivatives is automatically taken into account for your convenience. And you can choose whether you would like to focus on the influence of precious metals futures, precious metals options or, maybe, stock options.

Of course, seasonality is only one of the aspects of the forex market. At times, other factors can trump the influence of seasonal trends. A prominent example is the period following the 2011 U.S. debt downgrade, when the market driven by this event precisely at the time of the summer doldrums. It is crucial to combine USD seasonals with other signals, like the ones we provide in our Forex Trading Alerts or Gold & Silver Trading Alerts.

Whenever you feel like you want to dig deeper into seasonality and look at specific parts of the year for a wide array of assets, check out True Seasonals. You can analyze the market thanks to more detailed charts which we update for you.