Many traders use fundamental or technical analyses to predict future exchange rates. Excellent traders use both methods at the same time. However, it is not easy to analyse past price trends and price movements without considering the seasonal factors.
The Incredible January Effect
There is a concept called the “monthly effect” that has been quite popular in the stock market. The idea was first mentioned in 1942 by Robert A. Haugen and Josef Lakonishok in the book named “The Incredible January Effect”.
In the stock market, the January effect means that from the last trading day of December to the fifth trading day of the next year, the market tends to be bullish. It is due to most investors are selling their shares to realise capital gains or determine losses. On the other hand, some entities make similar transactions to restructure their financial statements.
The January effect is not the only strange phenomenon in the stock market. There is also something called Mark Twain Effect. The theory is that the stock market is fragile in October (derived from Mark Twain’s novel).
Plus, seasonal factors are not unique to the stock market. We can also find seasonal factors in the foreign exchange market. Like the stock market, the most widely known and famous seasonal factor in the foreign exchange market is the January effect.
This is due to foreign investors to exchange their currencies for U.S. dollars and buy stocks with U.S. dollars. Therefore, due to seasonal factors, the U.S. dollar often outperforms other currencies against some currencies. But keep in mind that not all currency pairs always have the same result.
Summer Vacation Seasonal Factors
July and August are the hottest summer months in the Northern Hemisphere. In the foreign exchange market, summer is the summer vacation period for traders, so volatility is reduced than usual.
Interestingly, both USD/JPY and USD/CAD have unique seasonal factors during the summer months. The two currency pairs show that the dollar strengthens against the counterpart in July and returns to the previous month’s gain in August.