Seasonal patterns in the currency market

Seasonal trends exist in all areas of life, from weather to fashion to fishing, so it should be no surprise they occur in the financial markets as well. These patterns are most common in commodity prices, which can be particularly sensitive to the weather. For example, wheat prices tend to rise in September and October when inventories hit a seasonal low and traders speculate on upcoming crops.

But seasonality also manifests itself in markets that are not affected by weather, such as gold. India is the world’s largest consumer of the yellow metal, and the price of gold can rise when demand is particularly strong, which tends to occur during the October-November Indian wedding and festival season.

Seasonality is a pattern that occurs at given times within a calendar year. If you believe in technical analysis, then seasonality should appeal to you because technical analysis is grounded in the belief that past price action and trading patterns repeat themselves. There is no better way to analyze past price activity than to look at price itself — without the dilution of technical indicators.

Stock market traders may already be familiar with the seasonality that can occur in U.S. equities, one of the best-known cases being the “January effect” — the tendency for stocks to perform particularly well between the last day of December and the fifth day of January. The month of December tends to bring a lot of repatriation and profit taking as investors cash in on stocks to create tax losses or to recognize profits. Corporations may do the same in an effort to “window dress” their balance sheets, because in some cases it may be positive if companies have more cash on hand.

In the first week of January, however, these year-end flows tend to reverse as some investors reestablish their prior positions, leading to a rally in U.S. equities. This happened between the last day of December 2008 and the fifth day of January 2009, when the Dow Jones Industrial Average rose more than 285 points (3.3 percent), from 8666.48 to 8952.89.

Seasonality or seasonal trends can also be found in the foreign exchange market. Since currencies can be affected by the movements in equities, it is not surprising that one of the strongest cases of seasonality in currencies is also in the month of January.