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May Seasonality Sees Best Month of Year for USD After April's Showers

May Seasonality Sees Best Month of Year for USD After April's Showers

Christopher Vecchio, CFA, Senior Strategist

Talking Points:

- May marks the best month of the year for the US Dollar after the seasonally worst month.

- The commodity currencies have typically rallied slumped during May.

- May is the final of four consecutive months of gains for the S&P 500.

See the full rundown of seasonal patterns broken down by currency pairs below, and to receive reports from this analyst, sign up for Christopher’s distribution list.

How quickly the tune has changed for the US Dollar. Between July 2014 and January 2016, the USDOLLAR Index did not post two consecutive months of declines. The uptrend has been checked hard after hitting new all-time highs in January, losing ground for three straight months, an occurrence unseen in two years (the USDOLLAR Index depreciated three months in a row from February to April 2014). Needless to say, the greenback’s had a stormy few months.

There may be some sunshine coming through the clouds: after the seasonally worst month of the year in April, May has historically been the best month of the year for the USDOLLAR Index. Price action at the start of the month has been supportive of a potential bottom forming in various USD-pairs, with daily key reversals in AUD/USD, GBP/USD, NZD/USD, and USD/CAD appearing within the first two days of the month.

The seeds for a new US Dollar bull trend to blossom have been planted, with the seasonality backdrop and the technical picture aligning in tandem right away. Unfortunately for traders, this means that the last piece of the puzzle is what the Federal Reserve thinks about incoming US economic data (which seems to be a moving target).

For May, as we did in April, we have expanded our focus on the period of 1996 to 2015 in recognition of the evolving relationship between economic data, central banks, and financial markets. The longer observation period captures several crisis events/periods that traders may find analogous to events unfolding today: the Asian crisis; the US tech bubble; the US housing bubble; the global commodity bubble; and previous rate hiking and rate cutting cycles, from the major central banks,during times normal (pre-2008) or extraordinary (post-2008). By increasing the sample size to 20 years, we believe the statistical stability of the estimates will have increased relative to utilizing a shorter time-frame/smaller sample size.

Learn how proper risk management can impact your trading results with the “Traits of Successful Traders” guide.

May Seasonality Sees Best Month of Year for USD After April's Showers

Forex Seasonality in Euro (via EURUSD)

May Seasonality Sees Best Month of Year for USD After April's Showers

May is a bearish month for EUR/USD, from a seasonality perspective, due to its inconsistent performance metrics. The pair has lost ground 55% of the time in May over the past 20 years, and its average performance during this time frame was -76-pips per month. Recently, EUR/USD has fallen in May in six consecutive years.

Forex Seasonality in British Pound (via GBPUSD)

May Seasonality Sees Best Month of Year for USD After April's Showers

May is a very bearish month for GBP/USD from a seasonality perspective. The pair has depreciated 70% of the time in May over the past 20 years, and its average performance during this time frame was -64-pips per month. GBP/USD has lost ground in May of every year since 2007 (save 2009).

Forex Seasonality in Japanese Yen (via USDJPY)

May Seasonality Sees Best Month of Year for USD After April's Showers

May is a neutral month for USD/JPY, from a seasonality perspective, due to its inconsistent performance metrics. The pair has gained or lost ground equal times in May over the past 20 years, yet its average performance during this time frame was -128-pips per month. Negative years have produced greater losses than positive years, on average. USD/JPY has gained ground in two of the past three years in May, however.

Forex Seasonality in Australian Dollar (via AUDUSD)

May Seasonality Sees Best Month of Year for USD After April's Showers

From a seasonality perspective, May is a very bearish month for AUD/USD. The pair has depreciated 70% of the time in May over the past 20 years, and its average performance during this time frame was -122-pips per month. Recently, AUD/USD has lost ground in five of the past six years.

Forex Seasonality in USDOLLAR

May Seasonality Sees Best Month of Year for USD After April's Showers

From a seasonality perspective, May is a very bullish month for the USDOLLAR Index. Indeed, May has been its best month of the year over the past 17 years*, appreciating 65% of the time while, on average, gaining +71.8-points per month during that timeframe. Recently, the USDOLLAR Index has gained ground in six consecutive years.

*USDOLLAR Index only has 17-year data from 1995 to 2015.

Forex Seasonality in New Zealand Dollar (via NZDUSD)

May Seasonality Sees Best Month of Year for USD After April's Showers

May is a very bearish month, from a seasonality perspective, for NZD/USD. The pair has depreciated 70% of the time in May over the past 20 years, and its average performance during this time frame is -106-pips per month. In recent years, NZD/USD has slumped in four consecutive years.

Forex Seasonality in Canadian Dollar (via USDCAD)

May Seasonality Sees Best Month of Year for USD After April's Showers

May is a slightly bearish month for USD/CADfrom a seasonality perspective (despite excessive weakness in AUD/USD and NZD/USD, relatively speaking). The pair has gained or lost ground in May equal times over the past 20 years, and its average performance during this time frame is -44-pips per month. Recently, USD/CAD has gained ground in five out of six years.

Forex Seasonality in Swiss Franc (via USDCHF)

May Seasonality Sees Best Month of Year for USD After April's Showers

From a seasonality perspective, May is a neutral month for USD/CHF, due to its directionless performance metrics. The pair has gained ground 55% of the time in May over the past 20 years, and its average performance during this time frame was +132-pips per month. Recently, USD/CHF has gained in May in four of the past five years (mirroring the performance of EUR/USD, which was notably skewed thanks to the EUR/CHF floor).

Forex Seasonality in S&P 500

May Seasonality Sees Best Month of Year for USD After April's Showers

May is a slightly bullish month for the S&P 500, from a seasonality perspective. The index has gained ground 60% of the time in May, and gains have averaged a mere +1.37-points over the past 20 years. Considering that it is widely understood that recent gains may have been driven by expansive central bank monetary policy during the post-GFC/Great Recession years, the S&P 500 is perhaps the most interesting instrument to track compared to its seasonality trends as the Fed attempts to normalize policy. Recently, the S&P 500 gained in each of the past three years. “Sell in May and go away” seems like a reaction from the immediate post-GFC years (although there is some credence to the idea of selling at the end of the month rather than the beginning, and staying flat through the end of September).

Forex Seasonality in Gold

May Seasonality Sees Best Month of Year for USD After April's Showers

From a seasonality perspective, May is only a slightly bearish month for Gold. The precious metal has depreciated 55% of the time in May over the past 20 years, and its average performance during this time frame was -$6.81/oz per month. Recent years haven’t been kind to Gold, with last year’s modest gain preceded by four years of steep losses. Gold’s performance metrics indicate a high degree of disparity, particularly since the GFC.

Read more: Risk FX Souring Quickly Ahead of Key US Data, Fed Speakers

--- Written by Christopher Vecchio, Currency Strategist

To contact Christopher Vecchio, e-mail cvecchio@dailyfx.com

Follow him on Twitter at @CVecchioFX

To be added to Christopher’s e-mail distribution list, please fill out this form

DailyFX provides forex news and technical analysis on the trends that influence the global currency markets.

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