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Forex Seasonality: How Does the Dollar Perform in September?

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It is often said that September is one of the worst months in the financial markets but out of the last 7 years, there was only one year that the S&P 500 closed lower than where it opened. On this quiet Labor Day Monday, we want to take the opportunity to revisit one of our favorite topics - Seasonality. This September is expected to be an extremely volatile one with the Federal Reserve gearing up to introduce its third round of stimulus. Once everyone returns from their summer holidays tomorrow, there will be widespread speculation about what the next round stimulus will look like and whether it will be enough to prevent the U.S. from falling into another recession. Quantitative Easing is good for stocks. After the central bank announced QE2 last November, the S&P 500 rose more than 15 percent before topping out in May. The prospect of more stimulus could provide a lift to stocks and in turn high beta currencies. Although QE3 would be positive for equities, it is negative for the U.S. dollar. Interestingly enough, weakness is in line with the seasonal behavior of the greenback in the month of September.

The first set of charts illustrates the performance of the EUR/USD and USD/CHF in the month of September. In 7 out of the last 10 years, both currencies gained value against the U.S. dollar in the month of September or 70 percent of the time.

There are many reasons to explain this unique seasonality, the most obvious of which is end of summer positioning. Typically volumes decline in the summer and once Labor Day which is the unofficial end of summer passes, fund managers put their money back into action in an attempt to generate more alpha before the end of the year.

For those that curious, the seasonality bias in USD/JPY is not as strong as the EUR/USD or USD/CHF. However we still see a slight tendency for the greenback to weaken as the average loss overshadows the average gain. Over the past 10 years, USD/JPY appreciated only 50 percent of the time. The GBP/USD, AUD/USD, NZD/USD and USD/CAD rose 6 out of the last 10 years.

The reason why we like to look at seasonality is because Technical Analysis is based on the idea that price patterns repeat themselves and seasonality is rooted in this very same concept. Seasonality is defined as a pattern that occurs at given times within the calendar and throughout the year, there are a good number of cases of seasonality. Seasonality does not work 100 percent of the time which is why trading seasonality blindly by buying the EUR/USD at the beginning of the month and selling it the end of the month is not necessarily the best thing to do. The best way to incorporate seasonality into your forex trading is to simply be mindful of it. For example, it may be a better idea to look for opportunities to sell the dollar against currencies like the Swiss Franc and Euro next month than to buy it. Seasonality simply helps us understand where the probabilities lie.

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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