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Which Currency Pairs Perform the Best in the Month of January?

Last updated 12/31/2009 7:42 AM ET (GMT -5) 13 Comments

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Kathy Lien

Director of Currency Research, GFT

With New Years Eve looming, it has been another quiet morning in the currency markets.  Jobless claims are the only pieces of noteworthy U.S. economic data due for release and given that most traders are more focused on ironing out their New Year plans than banking some yearend profits, claims will only have a limited impact on the forex markets.  As we turn the calendar to January 2010, we want to take this opportunity to talk about one of our favorite topics – seasonality. 

There is an old saying in the stock market that the first 5 days of trading in January sets the tone for the rest of the year.  Although this is not true for the currency market, what we do know is that the dollar tends to appreciate in the month of January.  December was a very strong month for the dollar, which strengthened significantly against all of the major currencies as incoming economic data point to an accelerating recovery in the U.S. economy.  Over the past week, the dollar managed to hold on to most of its gains, but a further rally is contingent upon another month of moderate job losses.  Forex traders will have to wait for next non-farm payrolls report for a fundamental catalyst to drive the dollar higher, but in the meantime, dollar bulls have seasonality on their side. 

The reason why we like to look at seasonality is because Technical Analysis is based on the idea that price patterns repeat themselves and seasonality is rooted in this very same concept.  Seasonality is defined as a pattern that occurs at given times within the calendar and throughout the year, there are a good number of cases of seasonality. 

The first set of charts illustrates the performance of the EUR/USD and USD/CHF in the month of January.  In 7 out of the last 10 years, both currencies lost value against the U.S. dollar in January.  In other words, during the first month of the year, the dollar strengthened against the euro and Swiss Franc 70 percent of the time.  The rally was particularly dramatic this past year as the credit crisis triggered massive deleveraging, driving investors into the safety of the U.S. dollar. 

There are many reasons to explain this unique seasonality, the most obvious of which is beginning of the year positioning.  Typically many foreign investors repatriate their money at year end to window dress up their balance sheets or prepare distributions.  In the beginning of the year, they reinitiate their positions or initiate new ones which can typically involve reweighing their investments in US equities and bonds. 

The seasonality bias in USD/JPY is not as strong as USD/CHF but it is still quite clear that the dollar tends to rise in the month January against the Japanese Yen. Although this trend has been in place for 6 out of the past 10 years, it is also important to note that this pattern has worn off lately with USD/JPY falling 3 out of the last 4 years.

Trading Seasonality

Seasonality does not work 100 percent of the time which is why trading seasonality blindly by selling the EUR/USD at the beginning of the month and buying it back at the end of the month is not necessarily the best thing to do – the recent performance of USD/JPY is the perfect example.  Therefore the best way to incorporate seasonality into your forex trading is to simply be mindful of it. For example, it may be a better idea to look for opportunities to buy the dollar against currencies like the Swiss Franc and Euro next month than to sell it. What seasonality tells us is where the probabilities are skewed.

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Comments (13)

alexjbrandt

December 31, 2009 at 08:02 AM ET

Your similar article back in November about December seasonality, showed the EUR/USD strengthening 7/10 times. Given that the EUR/USD actually weakened this month, wouldn't it be reasonable to think that the dollar will lose value in January? I'm not saying it will, but I think that with this month EUR/USD performing different then it normally does(based on historical price data), that next month the EUR/USD will perform different then it normal does. Call it abnormal seasonality :P lol

Mike

December 31, 2009 at 11:52 AM ET

nobody knows :)

FX4Sure

January 01, 2010 at 02:07 AM ET

is that a bet? =P

alexjbrandt

January 01, 2010 at 05:35 AM ET

I'll see your bet and raise you two lots :P

FX4Sure

January 04, 2010 at 07:49 AM ET

lol, see you at FX Stars

hsbc

December 31, 2009 at 11:57 AM ET

cha na bi

hu hong

December 31, 2009 at 12:05 PM ET

wai leng, i love you

GubyIQ

December 31, 2009 at 12:13 PM ET

good point alexjbrandt
i don`t pay attention to this kind of statistics anymore because it`s best to approach every week, month without any bias.

alexjbrandt

December 31, 2009 at 05:01 PM ET

I agree, an open mind is good! I do find the information in this article valuable and something to consider cause it is nice to know how a currency pair has performed historically for a certain time period, but since the EUR/USD bucked the stats for december, I'm more inclined to think it will do the same for january. But as Mike said, 'nobody knows'.

FXDragon

December 31, 2009 at 10:04 PM ET

Dollar will probably gain but not as much as december.

FX4Sure

January 01, 2010 at 02:09 AM ET

I think all depends on the first news releases..

CJ

January 01, 2010 at 10:03 AM ET

Kathy, Your insights are essential and you write beautifully.
Thank you and Happy, Healthy, Prosperous 2010.
CJ

hartzi

January 04, 2010 at 07:15 AM ET

I agree, lets say, the dollar will appreciate at around 3.75% in January.

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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.