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Euro - Sell in May and Go Away? Yes.

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You've heard the old saying sell in May and go away.

It's a well-known investment strategy for stocks that encourages investors to avoid the seasonal slump and volatility in equities by selling in May and returning in the beginning of November. Interestingly enough, this strategy also works in currencies but not in the exact same ways. First, simply selling in May and returning in November doesn't work at all. In the past 10 years, the Dollar index was lower in value in November compared to May only 50% of the time - which means there's no discernible pattern at all. This similar behavior was also seen in euro and sterling.

Instead, selling in the beginning of May and buying back at the end of the month was an extremely profitable strategy for in EUR/USD and GBP/USD 8 out of the last 10 years. Unsurprisingly, buying the dollar (Dollar index) on May 1st and selling it on May 31st also netted gains 8 out of the last 10 years as well. Sellers of the Australian and New Zealand dollars on the other hand needed more patience. While the following table shows that AUD/USD fell 6 out of the last 10 years (and rose less than 0.3% in 2 out of the remaining 4), the best technique for both currencies is to sell in May and buy back when everyone returns from summer vacations in early September. There was no discernible pattern in USD/JPY but for USD/CAD, buying in May and waiting until November to sell was the best strategy.

Of course every year is different but there are many factors that could make the next few months difficult for investors and EUR/USD in particular. The U.K. referendum in June poses a major risk for all of Europe, the recent strength of the euro could curtail the region's recovery while the continued impotence of central banks could make investors dubious of the global recovery. There may also be new elections in Europe with Spanish leaders failing to resolve a political stalemate. The migrant crisis fueled nationalism across the continent and is beginning to reshape all of Europe. Many major currencies including euro saw strong gains between early March and late April so a correction in May would not be natural.

As for what could drive the U.S. dollar higher in May? The May G7 Summit. At this stage, the only hope for the world is fiscal stimulus. If host country Japan unveils an aggressive package of new fiscal measures if will certainly help lift the dollar versus the yen but what the world really needs to coordinated fiscal stimulus and unfortunately there's not enough political for that to become reality. Meanwhile, this morning's ISM manufacturing report is yet another piece of data in a string of softer releases cementing the market's confidence that U.S. rates will not rise in June. This week's Non-Farm Payrolls report also won't reignite demand for the greenback. The problem is not job growth but retail sales and business investment. So unless stocks climb to record highs, the next 2 payroll reports rise 275K or more, average hourly earnings increase consistently AND consumer spending exceeds 0.5% in April and May, they won't be tightening until September at the earliest. The dollar will rise when investors hit a capitulation point, realize that they've priced everything in and start to feel that the strong gains in negative rate currencies are unjustified. Central bank speak will also be important - when policymakers finally express their discontent with the rise in their currencies, their words will turn the rallies around, driving the U.S. dollar higher in the process.

The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.


The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.

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Kathy Lien

As an expert on G20 currencies, Kathy Lien is often quoted in the Wall Street Journal, Reuters, Bloomberg, Marketwatch, Associated Press, AAP, UK Telegraph, Sydney Morning Herald and other leading news publications. She also appears regularly on CNBC - US, Asia and Europe and on Sky Business. Kathy is an internationally published author of the best selling book Day Trading and Swing Trading the Currency Market as well as The Little Book of Currency Trading and Millionaire Traders: How Everyday People Beat Wall Street at its Own Game - all published through Wiley.

Read Kathy's Bio