Not a universal trend

Interestingly, the dollar’s strength in January is not universal — there is no seasonal trend worth mentioning in the dollar/Japanese yen (USD/JPY) or British pound/dollar (GBP/USD) pairs, for example. The dollar may behave differently against the yen because Japan’s fiscal year ends in March rather than in December, as it does in the U.S. There is a much stronger case of seasonality in USD/JPY during the month of March.

Even if there is a seasonal trend or bias in a currency pair, it does not mean the pattern will be repeated 100 percent of the time. For example, if grapes that are used to make wine usually mature between August and October, a surprising freeze may delay or completely ruin the harvesting period. In life, there are always what some people refer to as “black swans” — rare, hard-to-predict events beyond the realm of normal expectations.

Seasonal trends can be incorporated into your trading strategy many ways. Following seasonality blindly would be a mistake but if your technical indicators tell you to sell Euros in the month of January, you know you have seasonality on your side, which may give you a stronger conviction to take the trade.

There are more cases of currency seasonality beyond the month of January. For example, the dollar tends to rise against the Canadian dollar in July, but then reverses those gains in August.