December Forex Trading Patterns

Last updated 11/19/2009 11:17 AM ET (GMT -5) 8 Comments

Forex Trading involves high risks, with the potential for substantial losses and is not suitable for all persons. Past performance is not necessarily indicative of future results.

Kathy Lien

Director of Currency Research, GFT

As we are heading into the last month of the year, we take this opportunity to look a one of our favorite topics in forex, seasonality. We have long discussed how, during certain months, currency pairs show a consistent bias to rise or fall and December is clearly no different. Along with the chaos of the end of the year has come a very stable and significant pattern that may hint at further dollar weakness.

A look at the price action of the EUR/USD over the past 11 years reveals a distinct pattern. Since 1998, seven out of the last eleven Decembers the euro performed strongly. Of course, the first thing that strikes you when looking at the chart is the 10.0% jump last year. Even though one might think this was a bit of an anomaly, we see similar outperformance in past years. For instance, in 2000 there was a nearly 8.0% jump, while in 2002 we saw a 5.5% rally. When it comes to this seasonality study, it turns out that magnitude is more important than probability. Even though 7 out of 11 are not very trustworthy odds, it is more important to focus on the fact that if December did result in a loss, those declines were capped at -0.47%. This end of year flow may be indicative of foreigners selling dollars and repatriating those funds back home.

An even more significant case of seasonality was found in NZD/USD. In the last decade, the New Zealand dollar only fell two times in the month of December. Otherwise gains were very strong, reaching 7.75% in 2000. However, the worst month was a bit more severe than what we saw in the euro with a drop of 2.95%. A similar is repeated in the AUD/USD which also rallied in the month of December 7 out of the last 11 years.

A number of factors may be behind these patterns including fiscal year end flows, demand for commodities, import and export trends or even travel. However, for whatever reason, pairs other than the euro, kiwi, and aussie did not show as significant results.

As you can see from the charts above, seasonality does not hold 100 percent of the time, so the best way to incorporate it into your FX trading is to simply keep it in the back of your mind. For example, it may be better to look for opportunities to buy NZD/USD in the month of December than to sell it. Seasonal trades do not always duplicate themselves, which is why trading seasonality blindly by selling at the beginning of the month and buying it back at the end of the month may not always be the best thing to do, but what seasonality does show us is where the probabilities are skewed.

Comments (8)

4xTrader

November 19, 2009 at 11:55 AM ET

Hi Kathy,
Do you think the EUR/USD is in a pull back phase right now so when the holiday season (seasonality) begins we can see the pair trading above 1.50?

rck66

November 19, 2009 at 01:39 PM ET

4xtrader:
I see resistance on EURUSD at the 1.51 area for now. A pullback could take it to I would say 1.42 or so, by looking at the daily. if it drops there before going above 1.51 then there could be a chance that it will go higher and surpass 1.51. Only thing I dont like is that EURUSD plays inverse to the market and I dont expect the stock market to go much higher, so if the pullback is strong (long bearish days) I dont expect 1.51 to be taken out for a while. If 1.40 breaks, next support is between 1.35 and 1.37

fuji

November 19, 2009 at 06:55 PM ET

Don't forget to view the EUR/USD daily chart appear to me is forming a triangle pattern, either it can break through the 1.5 key barrier and keep going or break down like the GBP/JPY last nite. this is only in my opinion

FXDragon

November 19, 2009 at 03:18 PM ET

You have a wide range man. Are you trading in space:)

Keith Jones

November 19, 2009 at 10:23 PM ET

Hi Kathy
It's interesting to note that the yr 2000 7.95% rally in eur/usd was from it's all time low (around 0.8200) since inception a year earlier, so any profit taking/repatriation would have involved unwinding substantial EUR/USD shorts. That same year was followed by the -0.47% year. If this current year,2009, repeats the pattern, it will also be negative don't you think? Last year eur/usd rallied 10.01% in December from the bottom of that year's big decline. This year profit taking (if it occurs) will be by unwinding eur/usd longs?

klien

November 30, 2009 at 10:26 AM ET

Thats a good observation. Unfortunately there is a much more limited amount of stats on that pattern whereas there are a larger amount of stats on the traditional Dec seasonality. Of course, that does not mean that the profit taking you described will not happen. Seasonality tells you where the odds lie but does not guarantee a repeat move.

Femi

November 30, 2009 at 09:54 AM ET

Hello Kathy,
How does one check for seasonal variations on other currency pairs like the USD/CAD pair?

klien

November 30, 2009 at 10:26 AM ET

You can download the data from GFT's Dealbook trading station and run a correlation function on excel

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About The Author

Kathy Lien began her FX trading career 10 years ago at J.P. Morgan Chase. After graduating New York University’s Leonard Stern School of Business at the age of 18, Kathy joined the bank's interbank FX trading desk and eventually moved to the cross markets proprietary trading desk. In the interbank market, her ability to create solid fundamental and technical analysis from the myriad of information on the market helped her trade forex spot and options. Her experience eventually led her to be chief strategist at Daily FX where she worked until she joined GFT in 2008.

With her knowledge of forex, as well as her experience trading other products, such as interest rate derivates, bonds, equities, and futures, Lien has built a reputation as an international currency analyst. She is frequently quoted on CNBC, Bloomberg, Fox Business and Reuters. Lien has also written for publications like Active Trader, Futures, and SFO magazine. She is the author of the newly updated Day Trading the Currency Market: Technical and Fundamental Strategies to Profit from Market Moves, and the co-author of Millionaire Traders: How Everyday People Are Beating Wall Street at Its Own Game with Boris Schlossberg.

To buy Kathy’s newly updated Day Trading and Swing Trading the Currency Market: Technical and Fundamental Strategies to Profit from Market Moves, click here.