January Seasonal Effect Favors Dollar Strength

In this article, we argue that there is an interesting seasonal pattern affecting the US dollar’s exchange rate during the month of January. To some extent, the U.S. dollar has a tendency to rise during the month of January, particularly against the Japanese yen. In fact, over the past decade the U.S. dollar rallied against the Japanese yen during 7 out of the last 10 years. It is true that past returns are not indicative of future results. Yet, price patterns do form in the currency market and there are many different ways to incorporate seasonality into your trading.

US Dollar – Japanese Yen ( USD/JPY)

The U.S. dollar appreciated against the Japanese yen in 20 out of the last 29 years, which is roughly 69 percent of the total sample. The seasonal effect was particularly strong during the 1999 to 2003 period. On average, the USD/JPY exchange rate gained 2.28 percent during the positive months and lost 2.72 percent during the negative months.

 

Euro – US Dollar ( EUR/USD)

We can also find evidence of seasonal effects in the EUR/USD exchange rate. In fact, during the month of January, the euro depreciated against the U.S. dollar 14 out of 22 times, which is roughly 64 percent of the total sample (synthetic euro prices were used prior to January 1999).  The seasonal effect was particularly strong during the 1996 to 2002 period. In addition, the data indicates that the euro lost on average 3.33 percent during the negative months and gained just 2.32 percent during the positive months.

 

British pound – US Dollar ( GBP/USD)

After considering the EUR/UD seasonality study, the January seasonal effect in the sterling is not surprising since the GBP/USD is highly correlated with the EUR/USD. In fact, during the month of January, the British pound fell against the U.S. dollar, 18 out of the past 29 years, which is roughly 62 percent of the total sample. On average, the GBP/USD gained 2.18 percent during the positive months compared with an average loss of 3.13 percent during the negative months.